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* | 20.3% | 36.8% | -5.19% |
* Since October 2, 2007
- During the third quarter, the BET and BET-FI indices reached historical highs on the 24th of July, subsequently dropping 13.7, respectively 21.4% to quarterly lows on the 17th of August.
- The structure of the BET index was modified on August 27, chemical plant Oltchim (OLT) and fertilizer producer Azomures (AZO) being replaced by SSIF broker (BRK) and Biofarm (BIO).
- On September 14, the trading of futures contracts on the BET index was introduced to the Bucharest Stock exchange, the first day’s turnover adding up to some EUR 62,700. The new instrument is a fair means for investors to counter market volatility risk. In neighboring markets, index derivatives account for 15-20% of trading volume.
Hot trades of the Quarter
The Rompetrol Group NV bought by KazMunay Gas
- The most important transaction of the three-month period covered is the sale of 75% of The Rompetrol Group N.V. to the Kazakh state company KazMunaiGas, which was mainly carrying out upstream operations. Previously, The Rompetrol Group was controlled by Rompetrol Holding S.A., at its turn, owned by businessmen Dinu Patriciu and Phil Stephenson. The enterprise value of The Rompetrol Group was set at USD 3.62 bn, given the following H1 financials: sales of USD 2.79 bn (+3% y/o/y), EBITDA of USD 115 mn (+83% y/o/y), net profit of USD 21 mn (+31%). Using annualization of the H1 picture, we computed the following valuation multiples for the entire group: EV/Sales = 0.65, EV/EBITDA = 15.7. KazMunaiGas yearly extracts over 17 million tons of oil and natural gas (as compared to Petrom with 6 mn tons/year), and the acquisition of Rompetrol meant access to important refining capacities and a distribution network within the perimeters of the European Union. The event had a positive rebound in the market for the shares of Rompetrol Rafinare
Constanta (RRC), listed in Bucharest, the price whopping some +50% in just two days fueled by investors’ speculations that cash flows from the new owner will pay off the convertible bond issue due in 2010. Currently, the market price is some 20% above the level at which it stood before the transaction. If the bond issue is paid off, the share-dilution scenario is cancelled, placing the current stock price at some discount from the market “fair value”. We mention that the possibility of halving the minority stakes in 2010 was one of the main reasons for the stagnation of the RRC price at 0.09 – 0.12 RON/share during the past two years.
Ford bought 72% of Automobile Craiova (AUCS)
- In the second week of September, the privatization contract of Automobile Craiova (AUCS) between the Romanian government - the State Asset Revaluation Authority (AVAS) - and Ford Motor company was signed at the 2007 Frankfurt Auto Motor Show. Ford agreed to pay EUR 57 million for 72% of the Craiova-based auto-maker’s capital. The value of the trade came as a shocking disappointment to local investors, who were expecting at least a fewtimes larger figure. The market price of AUCS stock dropped from a high of 36 RON/share to a low of 23 RON/share in just two days. market Information stated that the contract included terms such as restructuring of the company by focusing on the core activity (car manufacturing) by transferring all secondary operations into a newly created entity, the clearing up of the company’s debt, assuming consumer-liability for the cars in-use manufactured by the former owner, Daewoo, as well as the commitment of Ford to carry out some EUR 650 million in capital expenditures in the following years. Latest news available show that the possibility of canceling some debt to the budget was not properly communicated to all biding participants in the first place. This case will also be analyzed by the European Commission, to determine whether this is a State aid or not. If the verdict will be postponed, this will affect the moment of starting the operations at Craiova.
Lehman Brothers Real Estate entered in Impact (IMP) shareholding structure
- In the third week of September, another internationally renowned corporate name got involved into a transaction, this time carried out on the public equity market. The real-estate division of financial group Lehman Brothers purchased some 3.1% of the capital of Bucharest-based Impact Developer&Contractor (IMP), the most prominent local player in real-estate development and constructions. The value of the package added up to some RON 32 mn (EUR 9.5 mn). In a meeting with the media and analysts, Impact’s manager stated that Lehman might increase its participation in Impact in the following six months. Starting with October, Impact will start looking for powerful international partners with which to set up a maximum of 100 joint-ventures for the development of residential communities (residential areas with medical, educational, recreational, and commercial services).
Loulis Romania taken over by Raiffeisen investment vehicle
- Another significant transaction that took place in the third quarter, namely in July, was the acquisition of 60% of the share capital of Loulis S.A. Ilfov (MPN) by the holding company Leipnik Lundenburger Invest, part of the Raiffeisen Group. The control package was traded at RON 106.4 mn, the seller being the Greek Loulis International Foods Enterprises Ltd. This year, Loulis S.A. (formerly known as Mopan) expects a 65% growth in sales and an EBT figure of RON 13.3 mn, over five-times larger compared to 2006. Thus, Leipnik paid an estimated P/E 07 of around 16 and a P/S of 0.67.
Austrian Insurance group Wiener Staedtische bought 30% of Asirom
- A30% package of insurance company Asirom S.A. (ASRA) was also traded at the end of July. Interagro S.A. sold the package to Austrian leading insurer Wiener Staedtische Versicherung AG. The deal’s price was some 39% below that day’s regular market price. During the previous months another 2 packages of ASRA representing 14% and respectively some 13.7% were traded on the Rasdaq market. The first stake was sold by American fund Broadhurst investments probably to QVT Fund, which in turn sold a similar stake six weeks later at a premium of some 13%.
Companies with a good outlook for the year-end
- Policolor S.A. Bucharest (PCL) is expecting sales growth of 35% this year, up to EUR 56 mn. The company’s management based its expectation on the EUR 2.5 mn in capital expenditures carried out for the increase in production capacities for expanded polystyrene, adhesives and putties, as well as on the increased demand for paints and enamels, given their correlation to the construction market. The company’s manager declared that by the end of next year, the weight of construction materials in the company’s sales figure will be of 25%. The manager also sees a continued growth of the local construction market in the following 10 years. Based on the company’s expectations and our unconsolidated estimates, the P/E ratio for 2007 would currently stand at some 28.3. Policolor has a market cap of EUR 83.8 mln, and owns 64% of Bulgarian company Orgachim (StartradeBG symbol: BG.ORGH) via the investment vehicle Whitebeam Holdings. The Bulgarian entity has a market cap of around EUR 200 mln. End of 2007 could be the first release of consolidated statements of Policolor (PCL) and this would bring positive surprises.
- This year, a Rasdaq stock from a less conspicuously represented industry on the Romanian capital market – food and beverage – is on the verge of drifting into the spotlight: beer producer Bere Azuga S.A. (BEGY). This is an attractive small-cap, with a capitalization of EUR 8.6 mln but with a good potential in a 2-3 years perspective. The company has laid out a very ambitious plan of expanding its production capacity fourfold in just two-year’s time. Currently, the company is able to produce some 170,000 hectoliters of beer, by the end of the year, the output being expected to breach the 200,000 hectoliters mark. Production capacity is to reach 500,000 hl in 2008 and 700,000 hl in 2009. The company is looking at a farreaching EUR 11 mn in CAPEX backed by loans and operating cash-flows, but also by an incash share capital increase. In the first half of the year, the company’s sales hiked 55% y/o/y, our estimated year-end sales growth pushing no lower than 80% given the company’s expected total revenues for the year, RON 37.8 mn. The company announced it expects an EUR 500,000 net profit for 2007, lower than the initial budget of EUR 800,000 profit. In terms of sales, they will be in line with the budget, with EUR 10 mln for the whole year. The P/E07e becomes now 17.2.
| BSE + Rasdaq Mkt cap (EUR mn) | |
| 2002 | 4,410 |
| 2003 | 4,934 |
| 2004 | 10,882 |
| 2005 | 17,572 |
| 2006 | 24,540 |
| October 2, 2007 | 35,697 |
Top 25 market Capitalization as of October 2, 2007 (table)
Liquidity distribution over the last six-months (Apr’07 – Sep’07):
- We computed the daily average turnover for the 50 most liquid shares, in EUR terms, considering the transactions during the last 6 months (Apr 2007 – Sep 2007).
- Daily turnover increased in the third quarter, a total of 7 stocks trading at over EUR 1 mn daily, compared to 6 stocks last quarter;
- 36 stocks were traded above the EUR 100,000 daily average, compared to 24 last quarter, and triple compared to the Q1 review;
- 50 most liquid shares were traded more than EUR 50,000 daily average, up from the EUR 35,000 last quarter.
Top liquidity (Apr 2007 – Sep 2007) (table)
Main sectors at the Bucharest Stock Exchange:
1. Oil Sector
Petrom (SNP)
| Price | 0.53 RON/share |
| Capitalization | RON 30 bn (EUR 9 bn) |
| sales H1’ 2007 | RON 5.4 bn (EUR 1.6 bn) |
| Net Profit H1’ 2007 | RON 887 mn (EUR 265 mn) |
H1’ 2007 financial results and activity:
In the first half of 2007, the company’s sales figure dropped 14% y/o/y, to RON 5.43 bn (EUR 1.62 bn) because of lower selling prices and lower volume sold in the R&M, as a consequence of the overhaul of the Arpechim refinery. EBIT dropped 47% y/o/y to RON 942 mn due to lower operating profit from the E&P segment dubbed by declining oil prices and production volume, as well as negative pressure from the exchange rate. The Romanian currency gained some 13% against the U.S. dollar in H1’07. At the R&M level, operating losses diminished slightly. Net profit of SNP Petrom lost 38% y/o/y in H1 ’07, down to RON 887 mn (EUR 265 mn) due to weaker operations.
Following a 6-week major overhaul, activity at the Arpechim refinery was resumed in Q2. In the retail segment, average sales per gas station increased in H1 ’07 by 38.5% y/o/y, up to 1.44 million liters, corresponding to an annualized figure of some 2.9 million liters. The company estimates that it might achieve its 2010 sales volume objective ahead of time. At the end of the first six months, 398 gas stations were operating in the “full-agency” system, by the end of the year all stations being expected to operate in this system. 15 new gas stations were opened in the third quarter, and 32 new stations are under construction.
H1 capital expenditures stood at RON 1.3 bn, 74% higher than in the first six months of last year. 65% of CAPEX went into E&P, 25% were directed to R&M, the remaining 10% being invested into a modern IT infrastructure (Petrom Solutions), as well as into the natural gas and chemical segments. The capital spent on E&P was double vs. H1’06, alluding to efforts of sustaining future development.
In early September, Petrom bought back the service provider Petromservice in exchange for EUR 328.5 mn. The transaction is yet to be approved by the Antitrust Authority by the end of the year, being expected to be wrapped up in early 2008.
Another important event of this period was the transfer of an additional 10% package of Petrom shares to Fondul Proprietatea. The compensatory fund now holds 20.11% Petrom, becoming the company’s third significant shareholder, after OMV and the government (AVAS).
The H1 environment and outlook:
Worldwide demand for crude oil hiked 0.9% in the first half, averaging at 85 million bbl/day. Production came close at 85.1 mn bbl/day, adding a mere 0.1 mn bbl/day compared to H1’06. OPEC production increased by 1.9%, while non-OPEC production decreased 1.2% due to technical issues, early large-scale overhauls and closing-down of some extraction sites.
The average USD/RON rate dropped 12.9% in H1’07, down to 2.51 RON. The average EUR/RON rate dropped 5.9% in H1’07, down to 3.33 RON. The international price of Brent at the end of the first six months was 63.2 USD/bbl, losing 3.66% y/o/y, though gaining some 21% in Q2 compared to Q1. At the end of H1’07 Ural stood at 59.7 USD/bbl, losing 3.08% y/o/y, though gaining 22.6% in Q2 compared to Q1. Second quarter price hikes were a consequence of tension between Iran and the Western world, decline of U.S. oil supplies during the summer, the production halt in Nigeria, and the low OPEC output. Domestic natural gas price remained stable in H1’07 at an average of 288 USD/1000 cubic meters.
For the rest of the year 2007, continued volatility of oil price, refining margins and exchange rate is expected. Emphasis falls on the continued strengthening of the Romanian currency against the U.S. dollar, negatively affecting Petrom’s E&P revenues.The company claims to be able to stabilize declining internal production during the second half. Petrom recently discovered a significant oil and natural gas reserve in the Black Sea. The reserve is estimated to supply a daily volume of 357 tons of oil and 35,000 cubic meters of gas and will enter production in 2009.
In the R&M segment, focus will be set on the modernization of the Petrobrazi refinery, which will be closed for a 2-week overhaul in Q4, while in both refineries the priority will be completing EUstandard compliance programs. OMV president stated that the EUR 3 bn 2010 Petrom CAPEX budget will likely be exceeded since this year’s capital expenditures alone will go over EUR 1 bn. Within ten years, OMV intends to bring Petrom to Exxon Mobil efficiency.
SNP Projections 2007 – 2010 (table)
Our last estimate regarding 2007 net profits is 1,58 bn RON (about EUR 470 mn) but seeing the current barrel prices, the final figure could be higher. The Q3 results will show if an upward adjustment to our estimates is necessary.
Multiples valuation
| SNP Petrom | 2006 | 2007e |
| P/E | 13.8 | 14.3 |
| P/BV | 2.6 | 2.2 |
| P/Sales | 2.4 | 2.7 |
| EV/EBITDA | 8.4 | 10.3 |
The issue of the 8% package of Petrom shares to be offered to employees at the privatization price (0.0525 EUR/share) still hasn’t come to an end yet. The vice-president of the State Asset Revaluation Authority (AVAS), Constantin Botez recently stated that the government agency now intends to change the 2004 privatization law of Petrom in order for the shares to be offered to employees at the current market price (0.16 EUR/share), which in his opinion, should be the fair price of the shares. AVAS president argued that the reason behind the intended change in the offer price is to discourage any backdoor interests of the leader of the employees union, controversial businessman Liviu Luca. AVAS wants to sell the shares directly to the employees, not via the union. The issue whether only former employees (from the time of privatization) or actual and former employees together should benefit from this offer is also still unclear.
Rompetrol Rafinare Constanta (RRC)
| Price (Oct 9, 2007) | 0.121 RON/share |
| Capitalization | EUR 762 mn (RON 2.55 bn) |
| sales H1’2007 | USD 1088.5 mn |
| Net Profit H1’07 | USD 13.2 mn |
H1 2007 financials
The company made sales of USD 1088.5 mn in the first half of the year, up 16% y/o/y, and a net profit of USD 13.2 mn, compared to a loss of USD 6.4 mn in the corresponding period of last year. The H1 profit is above the figure budgeted at the beginning of the year, but the event did not have a significant effect on the stock price.
If we look back on the company’s profit history we notice that certain Income Statement components evolved positively, while others (for instance the net cost of financing) have a wider negative effect on profit than in 2004 or 2005. For this reason, current profit levels are insufficient to support an upward trend in the stock price in the medium-long term.
The environment
In the second quarter, worldwide oil prices surged due to reasons already described earlier, in the Petrom section. In the first half of 2007, the Ural refining margin (PVM) increased 9% y/o/y to 7.36 USD/bbl, while the Brent-Ural differential decreased 16% y/o/y.
In the second half of the year, Ural price is expected to rise due on one hand to a 10% increase by Russian authorities of export liabilities for the months of august and September, which will result in a low export volume to Europe, and on the other hand due to the decline of refining margins, which could put negative pressure on prices. The company has plans to double its market coverage from the estimated 280 stations as of now to some 500 in 2010.
As presented at the beginning of this material, in August, Rompetrol Holding S.A., registered in Switzerland, sold a 75% stake of Rompetrol Group NV (that owns 77.4% of RRC) to Kazakh state company KazMunaiGas. The transaction set the enterprise value of The Rompetrol Group at USD 3.62 bn and bore the following valuation multiples: EV/Sales = 0.65, EV/EBITDA = 15.7.
Operating efficiency of the refining segment
Noticing the refining margin/bbl in the last six year-halves, we can distinguish its span of development. The refining margin/bbl ratio can be quite well approximated dividing EBITDA by the refined volume. The “MedUrals margin” - to which Rompetrol Rafinare refers to in its H1 reports – reached its 6-quarter high, so the last quarter was the most favorable one for RRC in the last one year and a half. The margin’s span of development is quite wide (falling between 4 – 7.22 USD/bbl in the last 5 quarters), the impact on profitability being quite high for RRC. On average, we notice that RRC falls by 1-1.5 USD/bbl below the reference, this fact being expected to improve due to the undergoing program meant to increase operating efficiency.
| Refining margin | Q1/06 | Q2/06 | Q3/06 | Q4/06 | Q1/07 | Q2/07 |
| MedUrals (USD/bbl) | 6.99 | 5.38 | 4.02 | 5.7 | 7.22 | |
| RRC refining margin | -0.71 | 6 | 4.02 | 2.67 | 2.04 | 7.16 |
| OMV indicator | 6.12 | 4.52 | 3.76 | 5.25 | 7.06 |
A good quarterly operating profit does not lead to the same net result as two years ago.
If in 2005, an EBITDA margin of 9 – 11% led to a net margin of 6 – 8%, the financing cost and taxes being somewhere at 3 – 3.5% of sales, in the meantime, the increase in the cost of debt led to where a 10% EBITDA margin generates a mere 3% net margin (Q2/07).
Considering that the EBITDA margin depends on the company’s operating environment, we have the following scenarios given by net refining margin/bbl:
| Multi-annual (2005 - 2007) | optimistic | average | pessimistic |
| Net margin/bbl | 7 | 4 | 0 |
| EBITDA margin (%) | 10% | 6-7% | 1% |
| Net margin (%) | 3% | 0-1% | -2% |
Following a second quarter with efficient refining, it is probable that margins shrink in the following 3-6 months if the oil price increases, so that the most likely scenarios that we considered are: average = 5.5 USD/bbl, pessimistic = 4 USD/bbl.
| H2' 07 Scenario | optimistic | average | pessimistic |
| Net margin/bbl | 7 | 5.5 | 4 |
| EBITDA margin (%) | 10% | 8-9% | 6-7% |
| Net margin (%) | 3% | 1-2% | 0-1% |
Given these scenarios, an annual net profit of USD 13.1 – 32.7 mn is possible in 2007. In its budget, Rompetrol Rafinare had estimated a net profit of USD 23 mn for 2007.
| average | pessimistic | ||||
| 2007 Estimates | H1' 07 | H2' 07e | 2007e | H2' 07e | 2007e |
| Net margin/bbl | 4.17 | 5 | - | 4 | - |
| Net sales | 1088.5 | 1088.5 | 2177 | 1088.5 | 2177 |
| EBITDA margin (%) | 7.9% | 8.5% | 8.2% | 6.5% | 7.2% |
| EBITDA (mln USD) | 85.8 | 92.5 | 178.3 | 70.8 | 156.5 |
| Net profit margin (%) | 1.2% | 1.8% | 1.5% | 0.0% | 0.6% |
| Net profit (mln USD) | 13.1 | 19.6 | 32.7 | 0 | 13.1 |
At the capitalization mentioned at the top of the page, the P/E 07 ratio estimated by us is of 32.6 in the average scenario and 81.5 in the pessimistic scenario.
Impact of KazMunay Gas owning the group – from a strategic point of view, the integration into a larger player makes sense, as Rompetrol will have access to cheaper resources from the E&P segment of KazMunay. The impact on improving profitability could be noticeable starting 2008.
2. Banking Sector
- At H1 2007, BRD – Groupe Societe Generale (BRD) and Banca Transilvania (TLV) both reported profit increases of 32-35% y/y, while revenues had a higher growth rate for TLV at 70%, compared to 51% revenues growth y/y for BRD;
- TLV’s H1 profit stood at RON 79.5 mn, total revenues adding up to RON 1.04 bn. The bank’s assets grew a 22% YTD, up to some RON 10 bn. BRD made RON 417 mn in H1 net profit, total revenues adding up to RON 3.8 bn. The bank’s assets increased 9.9% YTD, up to RON 30.8 bn;
- The insurance company Asiban, in which both BRD and TLV hold stakes of 20% each will most probably be sold this year. TLV representatives publicly stated that they expect their package to be worth some EUR 25 mn. An eventual sale of the package would have a significant but non-recurring effect on the 2007 net profit. The bank is expecting net income of some EUR 43 mn this year.
BRD Groupe Societe Generale (BRD)
– market capitalization: EUR 5.5 bn ;
– The share price is 26.7 RON/share, 0.7% below the level of our last review;
– At the end of H1 2007, BRD had 2.2 million customers, had issued 2 million cards and operated a network of 1100 ATMs and over 10.000 POS’s;
– ROE increased to 38.1%;
– Loans reached RON 20.8 bn, up 51% y/o/y, corporate loans growing at a slightly higher pace. Deposits summed up to RON 26.4 bn;
Banca Transilvania (TLV)
- market capitalization: EUR 1.65 bn
- The market capitalization increased in the last three months by some 7%.
- After the first half of the year, the bank had a total number of units of 396, and over 5200 employees. On the 30th of June, 2007, the number of active customers stood at 897,000, up by 27% YTD. Most of the growth came from the retail segment. At the end of H1, the bank had 593 ATM’s nad 6125 POS’s, compared to 443 ATM’s and 3660 POS’s at the end of H1’06;
- Loans increased 30% y/o/y in H1, up to RON 6.4 bn. Deposits surged 23.5% y/o/y, up to RON 7.5 bn;
- Our calculations show that Banca Transilvania is currently fairly priced; the management doesn’t take into account the option of selling the bank, considering that the current dimension and the current access to resources still allows an expansion in the next 2-3 years. At the end of 2007 the management will develop the strategy of the next 3 years of growth.
| BRD | TLV | |
| Average price October 9, 2007 (RON) | 26.9 | 0.89 |
| Capitalization – EUR bn | 5.5 | 1.65 |
| P/BV 07e | 6.1 | 4.6 |
| P/E 06 | 31.8 | 51 |
| P/E 07e | 22.1 | 41.8 |
3. Pharmaceuticals
- The Romanian pharmaceutical market grew some 18.8% y/o/y in the first half of 2007. According to a research carried out by Raiffeisen Investment Romania, published by Business Digest, overall sales are estimated to reach some EUR 1.58 bn by the end of the year, and EUR 2.4 bn by 2010, almost 80% up from 2006. In 2005, pharmaceuticals accounted for 1.3% of GDP, then, 1.8% of GDP in 2006, and are estimated to reach 2.2% of GDP in 2008;
Antibiotice Iasi (ATB)
| sales H1’2007 | EUR 30.5 mn (+17% y-o-y) |
| market capitalization | EUR 266 mn |
- Antibiotice is still under government control, the State Asset Revaluat
Romanian CapMarket Outlook Oct07.pdf, 157 Kb
