Periodic Report. April 2009

Transcription

1 2 April 2009 BRE Bank Securities Periodic Report BRE Bank Securities Equity Market Macroeconomics Average 2009E P/E Average 2010E P/E Avg daily trading volume PLN 983m April 2009 vs. indices in the region pkt Equity market The positive surprises seen in the ISM/PMI indicators do not mean that the downturn in the global economy is over; in fact, they do not even mean that next year's rebound in GDP growth will exceed 1%. Nonetheless, after the 58% decline in the S&P500, a correction of at least a few months should be in order. In the case of Poland, we still believe that in mid-2009, 20 will approach 2000 points. Company News Banks. We remain bullish on the financial sector. The expected drop in profits is already priced in bank stocks. We would recommend overweighting larger players versus smaller banks, and ING BSK versus Bank Handlowy. Kredyt Bank remains our least favorite stock. BUX PX Analysts: Michał Marczak (+48 22) michal.marczak@dibre.com.pl Marta Jeżewska (+48 22) marta.jezewska@dibre.com.pl Kamil Kliszcz (+48 22) kamil.kliszcz@dibre.com.pl Piotr Grzybowski (+48 22) piotr.grzybowski@dibre.com.pl Maciej Stokłosa (+48 22) maciej.stoklosa@dibre.com.pl Gas&Oil. After a rally in the last few months, Lotos stock may display weaker performance in April due to expectations of weak first-quarter earnings figures. In case of PKN Orlen, this effect should be fully offset by expected agreements with banks. We remain neutral on PGNiG. Telecommunications Changes in Netia shareholder structure could accelerate the entry of a strong industry investor, which would be an unfavorable development for TPSA. We recommend buying Netia and holding TPSA. Media. We expect that April should be a better month for the companies that rely on the advertising market, i.e. Agora and TVN. TVN should partially regain the ground it has lost after the investors' sentiment worsened upon the news of the 'n' purchase. IT. After the significant rallies on the distributors stocks, we are expecting a relatively better performance from Asbis and AB. IT integrators should partially bridge the growth rate gap to the market that emerged in March. Metals. The increase in metal prices is not a consequence of the demand/ supply relationship, but of speculation based on expectations of future inflation and USD depreciation. After Q1 2009, KGHM could meet the Management s FY 2009 target. Macroeconomic Analyst BRE Bank Macroeconomics Team Construction. At current price levels, Mostostal Warszawa and Trakcja Polska are both attractive investments. Polimex could exceed expectations with first-quarter results. Prices of Budimex and PBG prompt hold ratings. Property Developers. The share values of Polnord and J.W. Construction factor in an expected 30% drop in housing prices. We recommend holding Dom Development, whose net asset value corresponds to our estimates. Retail. We continue to favor Emperia as the best FMCG pick for the medium term at the current price level. We recommend accumulating Eurocash on any price weakness. Ratings. We are downgrading our ratings on the following stocks as of the release date of this monthly report: Handlowy (Hold), KGHM (Accumulate), Millennium (Hold), Mondi (Hold), Rafako (Accumulate), ZA Puławy (Hold). BRE 2 April 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.

2 Table of Contents 1. Equity Market Macroeconomics Current ratings by BRE Bank Securities Ratings statistics Financial Sector BZ WBK Handlowy ING BSK Kredyt Bank Millennium Pekao SA PKO BP Gas & Oil, Chemicals Ciech Lotos PGNiG PKN Orlen Police ZA Puławy Telecommunications Netia TP SA Media Agora Cyfrowy Polsat TVN WSiP IT Sector AB Action ASBIS Komputronik Metals Kęty KGHM Construction Budimex Elektrobudowa Erbud Mostostal Warszawa PBG Polimex Mostostal Rafako Trakcja Polska Ulma Construccion Polska Unibep Real Estate Development Dom Development J.W. Construction Polnord Retail\Wholesale Emperia Holding Eurocash Other Mondi April

3 Equity Market In March, almost all the stock markets around the world rallied to reverse the losses seen at the start of the year. The direct bullish impulse came from stimulus programs, which appeared at a moment when many analysts especially those who use technical analysis - believed that S&P 500 will probe the level of points. In this situation, the first wave of the rallies is by and large an effect of short positions being closed, which we believe applies to Central and Eastern European markets as well, especially in the case of bank stocks, which provide exposure to the overall economic situation. Bearish speculation has brought share prices to the level that discounts a 1-2% decline in the GDP in Poland, which we believe is not going to happen. Poland and the entire CEE region is still underperforming other emerging markets. Asian countries such as China and Korea are the clear leaders. In March, both in the US and in the EU, investors were confronted with very divergent macroeconomic data. The bad news primarily concerned unemployment, the good news - the leading indicators and the first signals that the real-estate market was bottoming out. Loan spread data indicate that liquidity is gradually returning to the banking sectors of the developed countries, which is the key precondition for a return to economic stability. Although GDP growth forecasts are consistently being reduced for more and more countries, such stabilization should come, considering the ISM/PMI indicators for the key developed countries. In the case of Poland as well, PMI RBS increased for the third time in a row in March (42.2), after hitting the rock bottom in January (38.8). The Y/Y production or retail sales growth data will continue to be negative, but every month less so. Of course, the leading indicators do not mean that the downturn in the global economy is over; in fact, they do not even mean that next year's rebound in GDP growth will exceed 1%. Nonetheless, after the 58% decline in the S&P500, a correction lasting at least a few months should be in order. In the case of Poland, we still believe that in mid-2009, 20 will approach 2000 points. We will see weak company earnings data for Q1 2009, but they will not necessarily have a negative impact on the investors behavior. We believe that in the current situation, when domestic institutions still await the rock bottom while foreign investors underweight the Polish stocks, and everybody expect very weak earnings (especially after the last release of industrial production data) - should the April/May (i.e. Q2) macroeconomic data exceed expectations, the weak Q1 09 will be interpreted as history that has already have been discounted. We still consider bank valuations attractive, seeing that they have been depressed by the risk related to FX derivatives (which, according to the data from the Financial Supervision Authority, are actually not as big a problem as the media have been suggesting) and the worries about future loan loss provisions (in the negative scenario of -2% GDP growth, some of the banks forecast lower provisions than we have forecasted for 2009). Commodity companies should continue to perform well, benefiting from the increases in commodity prices. Here, despite the lack of fundamental reasons (demand/supply), prices might continue to go up due to concerns about future inflation (not before 2010) and the depreciation of the USD. Leading indicators suggest we have already seen the trough The US and EU leading indicators are steadying. This is what we expected when we made optimistic predictions for the stock market situation in H The PMI index for the Eurozone increased from 33.5 pts in February to 34.0 pts in March (from 39.2 pts to 40.1 pts for the service sector). The leading indicators for Germany also exceeded expectations (Ifo and ZEW), as did the ISM index for the American industry (from 35.8 pts to 36.3 pts). Surprisingly good data were published for the UK as well (39.1 pts vs pts) as well as Poland (42.2 pts vs pts). 2 April

4 Industrial leading indicators in selected developed countries United Kingdom Germany France USA Jan 05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Source: Bloomberg The ISM index for the American industry was the first to begin a slow upwards climb (earlier than in Europe), indicating that the rate of decline in durable goods orders was going to decelerate two months before that actually happened (durable goods orders increased by 3.4% m/ m in February vs. -7.3% in January (revised)). While it is partially an effect of the low base, it might also indicate that demand is bottoming out. In Europe, we can see a two month delay vs. the USA. In Germany, which is the key market for Polish exports, there is an additional month of delay. ISM in USA and PMI in Germany vs. durable goods orders 55 pts (%) pts (%) ISM USA Durable goods orders, y/y PMI Germany Durable goods orders, y/y Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Source: Bloomberg The first good news have also come from the US real-estate market. While prices are still falling fast, new home sales increased by 4.7% in February (vs. -2.9% consensus), and the number of unsold homes seems to have reached a stable level (12.2x monthly sales). Sales improved at the early stages of construction (not started, sold and under construction), which, when coupled with the surprising increase in mortgage loan applications, could indicate that consumer optimism is increasing and financing is becoming more available. If these data are further confirmed in the upcoming months, investors should welcome this, all the more so that the sales of homes under construction have an impact on the situation in the construction industry. Of course, these data do not mean that the downturn in the global economy is over; in fact, they do not even mean that next year's rebound in GDP growth will exceed 1%. Nonetheless, after the 58% decline in the S&P500, a correction of at least a few months should be in order. 2 April

5 Central bank policies and commodity prices The global recession has forced the central banks of practically all countries to come up with stimulus packages. In the recent months, the most spectacular achievements in this domain are those of the FED and the Bank of England, which decided to redeem treasury bonds, thereby drastically increasing the monetary base, as well as the Bank of Switzerland, which is attempting to depreciate the CHF through market interventions. With the global GDP decline in 2009 forecasted at 1.5-2% (World Bank, investment banks), such policies have no impact on inflation. According to macroeconomic predictions, inflation should fall in the upcoming months. In such countries as the US, Japan, Spain and Switzerland, a deflationary scenario remains likely. This will not change until the situation in the labor market improves (in the upcoming quarters, we should see increasing unemployment), i.e. until salaries start growing again. The "task of inflation, as well USD depreciation, will be to monetize the huge public debt in the US. The prospect of inflation and weak USD might continue to support commodity prices, although at present there are no fundamental reasons (i.e. demand/supply driven) for their continuing increase. We have seen a similar situation in the 70s. After the first wave of fast rallies in 1974, commodity prices collapsed under the impact of recession in the following two years. When liquidity was provided to rescue the economy, and inflation growth followed suit, another wave of rallies was seen on metals and petroleum. The current mechanisms are very similar, with the caveat that the scale of the increase in the US and UK monetary base is much greater than in the 70s, which might shorten the period of commodity depreciation between cycles. Copper prices in the 70s vs. US CPI; prices in the 70s and the 00s USD/t USD/t CPI CU'00 CU'00P CU' / / / / / / / / / / / / /2014 Source: Bloomberg Losses on FX derivatives strongly exaggerated Banks are still one of the weaker sectors in the WSE, having lost value due to the risk related to FX derivatives. Compared to the previous information on the scale of the potential losses, the newest data from the KNF paint a much different picture. According to these data, valuation losses on corporate FX options as of February 13 amounted to PLN 9bn, and on other FX derivatives to ca. PLN 7bn (forward transactions) and ca. PLN 2bn (swaps). Approximately 80-85% of companies that transacted in derivatives should not incur any losses, because they used them to hedge export revenues. Speculators amount to fewer than 10% of all the companies involved, and the costs incurred by the banks pose no threat to their solvency. Investors should welcome the news that the scale of the losses and the number of speculators are much lower than the press has been reporting (even PLN 200bn in some reports, which also alleged speculation was common among companies). It should be remember that valuation losses do not entail losses for a company that used these instruments for hedging only. For such companies, the risk lies in lower volumes of the hedged export sales, due to the recession engulfing foreign markets. This should not be a very big effect, however. 2 April

6 Macroeconomics Interest rates go down As expected, the Monetary Policy Council (RPP) cut interest rated by 25ps, to 3.75%. In its press release, the Council pointed out several risks for economic growth as well as a deterioration in access to corporate and retail credit. The February increase in inflation and producer prices is related to the growth of controlled prices and the rapid depreciation of the zloty. The Council, however, considers this increase in prices a temporary phenomenon; the economic slowdown and the deterioration in the labor market will help pull the inflation rate towards the target. What struck our attention in the press release was the claim that in the Council's opinion, the positive effects of monetary loosening can already be seen (i.e. present tense was used, as opposed to past tense in the previous releases). The factors the RPP is planning to monitor in the near future include, in addition to the macroeconomic data, the situation in the financial markets and the exchange rate of the zloty. Exchange rate was in fact the sole topic of the press conference held after the decision was announced. The members of the RPP stress that the exchange rate is by and large shaped by external factors, such as the foreign investors' risk aversion. The Council chose not to make an asymmetric cut in the deposit rate and the reserve requirement, with its members arguing that such a move would have to be preceded by a further analysis of liquidity in the interbank market and that the banks lending behavior would have to be monitored. The deposit rate cannot be cut now, because FX swaps are based on it. As for the outlook for monetary policy, we expect loosening to continue for several more months, and the RPP members have confirmed this. Interest rates will probably be brought down to %. As significant cuts have already been made, the process may now be spread out in time. Retail sales In February, retail sales fell by 1.6% y/y (vs. +1.3% y/y in January), declining for the first time in four years. The decline was mostly due to the anemic growth in food sales (2% y/y) and in the sales of furniture and household equipment, coupled with a sharp drop in car sales (- 12.3% y/y) and in the "other category (-7.5% y/y). It should be stressed that were it not for the anomalies in food and car sales (trade in the border zone boosted by the weak zloty, car reexportation to Germany and aggressive promotions by car retailers), the data would be even worse. In this cycle, consumer demand is declining much faster than in the previous cycles, perhaps because the structure of the demand is now different (vs., for example, ). It appears that autonomous consumption plays a much smaller role, and that there is much more room for the savings rate to increase because consumption relies to a much greater extent on current and expected income, which are now being revised downward very rapidly. All this will lead to a significant slowdown in consumption growth: we do not expect it to exceed 2% y/y. Under this scenario, budget revenues will decline by more than PLN 20bn. Industrial production In February, industrial output contracted by 14.3% y/y (in January, by 15.3% y/y). Month-onmonth, industrial output increased by 2.7%, which, given seasonal factors and the downtimes recorded in January, is very modest. The weakening of demand seems to be spilling into most sectors for good: year-on-year declines were noted in 25 out of 34 (in January, in 26). The deepest falls were observed in metals, cars, mining and rubber. Judging from the sector-bysector composition, the decline seems to be primarily driven by the decreased demand for capital and supply goods in Western Europe. We see growth only in such idiosyncratic sectors as drinks. In the horizon of a few months, we are expecting mostly due to base effects the Y/Y rates to improve. The momentum is likely to remain negative until mid-year, however. PPI In February, we saw a further sharp increase in producer prices. In both January and February, they increased by 2.3% m/m (much above consensus), which pushed the y/y rate to 5.4% vs. 3.6% in January. While as recently as one month ago the increase in prices was mostly a consequence of the higher cost of energy (+9.8% m/m), in February it was largely driven by manufacturing prices (2.3% m/m vs. 0.8% m/m in January). Based on the available data and sentiment indicators, we believe that the disinflationary push from decreased capacity utilization was only temporarily disturbed (adjustment of prices to new energy prices, impact of the record depreciation of the zloty). Due, however, to the current level of prices, the year-on-year growth in PPI should remain at an elevated level in the near future. Moreover, because there is the possibility that price adjustments are not fully coordinated between the individual companies, further month-on-month growth in manufacturing prices is possible. In a longer term, price growth should be contained by the depressed demand and inventories, which remain high. Less fluctuation in FX rates will also help. Labor market In February, employment growth in the enterprise sector fell to 5.1% y/y from 8.1% y/y seen in 2 April

7 January. This in line with the trend and our expectations: salary growth is systematically slowing down, both due to the decline in the profit-linked component of remuneration and because the employees bargaining power is decreasing as unemployment is set to rise (it should be stressed that the deterioration in the labor market is merely beginning and that it is set to intensify in the upcoming months). It is also important that in the previous months, salary growth was artificially inflated by postponed salary and bonus disbursements. We expect that in the upcoming months salary growth will decline towards 2-3% y/y. The slower salary growth by and large means that the Monetary Policy Council no longer needs to monitor labor marketdriven pressure on prices; the Council's attention will shift towards production and retail sales. Employment growth was in line with expectations: a decline by 22,000 in absolute terms, which entails -0.2% y/y. So far, the data do not indicate that the process of group layoffs has accelerated; nonetheless, it should be expected that the month-on-month layoff rate will remain at a steady level (although there is also the possibility that some of the planned layoffs will cumulate in certain months and we will see spikes in the m/m data), which will consistently depress the y/y rate (it can fall as low as -1.0% y/y already in March). The outlook for the labor market remains unfavorable: high payroll cost and high inventory levels will enforce restructuring and employment optimization. Employment is contracting more slowly, however, which may suggest that employers are less elastic than we previously estimated. In terms of the picture in individual sectors, we expect to see the biggest job cuts in sectors linked to retail consumption and in the construction industry. Inflation In February, the annual inflation rate increased to 3.3%. The devil, however, is in the details: month on month, the prices surged by the whooping 0.9%; the fact that the annual rate was below consensus stems from the introduction of a new inflation basket, in which food carries less weight, while communications, house-maintenance expenses and energy carriers, more. The new weights pushed the annual inflation rate down by ca. 0.3% (we can therefore venture to say that with the basket unchanged, inflation would reach 3.6% y/y, i.e. exactly what we had forecasted). To return to the main point, the month-on-month increase in consumer prices was primarily a consequence of increases in controlled prices (energy prices went up by 2.9% m/ m), fuel prices (7.1% m/m) and service prices (healthcare, home maintenance, entertainment). In addition to the delayed increases in the price of services and in controlled prices, the increase in the inflation rate may have been to a certain extent a consequence of the depreciation of the zloty (cf. fuels and the "entertainment" category). Core inflation most likely increased from 2.6% in January to 2.7%. As far as the outlook for the short term is concerned, we are expecting the inflation rate to remain at a higher level for several months, due to price hikes from the start of the year, the weaker zloty and the likely increases in food prices. We do not expect core inflation to increase further. By the end of the year, inflation should fall down to the NBP's target of 2.5%. C/A In January, the current account deficit contracted to EUR 1078m, mostly due to the sharp reduction in the balance of trade in goods deficit (EUR 441m) and the lower income of foreign direct investors. The balance of trade is particularly interesting. Although the slightly lowerthan-expected contraction in exports (-25.2% y/y) is hardly a surprise (in January, we saw the production of investment and supply goods plunge, although there was also an increase in trade conducted in the border zones), imports started to contract much faster (-26.6%). The balance of trade in services was positive in January (+PLN 210bn). It appears that the importsintensive outlays on consumption and investment were being reduced in January at a much faster rate than we expected. As far as deficit financing is concerned, we noticed an increase in foreign direct investment (EUR 1475m balance) and a decrease in portfolio investment (non-residents bought fewer bonds than the Ministry of Finance planned to redeem) to -PLN 725m. The fast decrease in imports and the steadying of the rate at which exports are contracting suggests that in the ensuing months the trade deficit may be up for improvement. Among causes, we should note the weaker consumption (increase in the savings rate), the first symptoms that business activity in industry is stabilizing and the possible growth in trade in the border zone and in re-exports (cars). It appears that adjustment to the (temporarily?) lower inflows of portfolio investment and the higher cost of debt servicing will coincide with a decrease in the investors risk aversion (return to emerging markets). The data, in particular the improvement in current account deficit, make another interest rate cut likely (the higher m/ m inflation will fail to impress the Monetary Policy Council (RPP), whose members concur that inflation will continue falling later in the year). Budget deficit After February, budget deficit stands at 29% of the total amount planned for Revenues amounted to PLN 46.7bn, i.e. 15.4% of the planned amount. Expenses reached PLN 52.0bn, i.e. 16.2% of the plan. Revenues were 7.6% higher than in the same period a year ago. It should be pointed out that in January, and thus in the January-February period, revenues were 2 April

8 inflated by proceeds from the excise tax. VAT revenues are growing very slowly: after February, they were almost PLN 300m lower than in the same period a year ago. Personal income tax revenues in January were most likely inflated by the practice of disbursing bonuses, and frequently also December salaries, in the new tax year. In February 2009 itself, personal income tax proceeds increased by 0% y/y. We should also take note of the very low utilization of EU funds (structural funds at 5.3% of the plan, although the situation was even worse in 2008, with merely 0.6% of the plan carried out). Lower levels of economic activity, including the (much) lower consumption growth (our current forecast is under 2% y/y) implies that the FY revenue plan will be missed by some PLN 20bn, which will make a budget amendment necessary. As for the short-term perspective, we expect that due to the much lower than expected growth in tax revenues, budget deficit may reach 60% of the planned amount already after March. On occasion of the publication of the detailed budget execution data, the Ministry of Finance informed that it had PLN 24bn in foreign currencies. This declaration is particularly important in the light of the current or planned operations in the forex market. The Ministry did not disclose the size of such operations, however. 2 April

9 Current ratings by BRE Bank Securities S.A. Company Rating Target price Date issued AB Hold ACTION Accumulate AGORA Buy ASBIS Hold BUDIMEX Hold BZWBK Buy CIECH Hold CYFROWY POLSAT Buy DOM DEVELOPMENT Hold ELEKTROBUDOWA Buy EMPERIA HOLDING Buy ERBUD Buy EUROCASH Accumulate HANDLOWY Hold ING BSK Buy J.W. CONSTRUCTION Buy KĘTY Buy KGHM Accumulate KOMPUTRONIK Accumulate KREDYT BANK Sell LOTOS Buy MILLENNIUM Hold MONDI Hold MOSTOSTAL WARSZAWA Buy NETIA Buy NOBLE BANK Suspended PBG Hold PEKAO Buy PGNiG Hold PKN ORLEN Buy PKO BP Buy POLICE Hold POLIMEX MOSTOSTAL Buy POLNORD Buy RAFAKO Accumulate TELEKOMUNIKACJA POLSKA Hold TRAKCJA POLSKA Buy TVN Buy ULMA CONSTRUCCION POLSKA Hold UNIBEP Buy WSiP Buy ZA PUŁAWY Hold April

10 Ratings issued in the past month Company Rating Previous rating Target price Date issued BUDIMEX Hold Buy BZWBK Buy Buy CYFROWY POLSAT Buy Accumulate DOM DEVELOPMENT Hold ELEKTROBUDOWA Buy Buy ERBUD Buy Buy HANDLOWY Accumulate Buy ING BSK Buy Buy J.W. CONSTRUCTION Buy KREDYT BANK Sell Buy LOTOS Buy Buy MILLENNIUM Buy Buy MOSTOSTAL WARSZAWA Buy Buy PBG Hold Hold PEKAO Buy Buy PGNiG Hold Hold PKO BP Buy Buy POLICE Hold Hold POLIMEX MOSTOSTAL Buy Buy POLNORD Buy RAFAKO Buy Buy TRAKCJA POLSKA Buy Buy ULMA CONSTRUCCION POLSKA Hold Hold UNIBEP Buy Buy Ratings changed as of 2 April 2009 Company Rating Previous rating Target price Date issued HANDLOWY Hold Accumulate KGHM Accumulate Buy MILLENNIUM Hold Buy MONDI Hold Buy RAFAKO Accumulate Buy ZA PUŁAWY Hold Accumulate Recommendation Statistics All Issuers who are clients of BRE Bank Securities Statistics Sell Reduce Hold Accumulate Buy Sell Reduce Hold Accumulate Buy count % of total 2.4% 0.0% 34.1% 12.2% 51.2% 0.0% 0.0% 10.0% 10.0% 80.0% 2 April

11 Financial Sector Pengab down to 11.4 pts (-1.3 pts m/m) The aggregate assessment of the current situation declined by 2.6pts m/m to 9.3pts, while the outlook assessment went up by 0.2pts to 13.6pts. Zloty deposits are steadying, while fewer FX deposits are coming in. There are no expectations of a trend reversal in the near future. A revival in lending has been observed, especially in the case of retail loans (mostly consumer loans). We expect this revival to continue. Loan prices have stopped growing; bankers are even expecting them to fall in the foreseeable future (by 0.66pts in the case of loans granted "towards a business objective"). The demand for securities is at steady, low levels and no changes are expected here. Growth is expected in the market for insurance policies, however. The historical minimum of Pengab, 9.7pts, was recorded in February The index did fall below 12pts on two other occasions only, in December 2001 (11.5pts) and in January 2003 (10.2pts). The downward trend in Pengab is nearing its end, although we do agree that it is too early to announce a reversal. This year, Pengab may remain weak, because sentiment will be impacted by weak bank earnings. Banks will retain profits In line with our expectations, almost all the banks will retain their profits and abstain from dividend payments. While not all the banks have already held shareholder meetings, we do know the Management's recommendations, which in a number of cases received a stamp of approval from the Supervisory Board. Given the very conservative approach of the Financial Supervision Authority (KNF) and the public declarations that the banks need to retain their profits for FY2008, we do not expect surprises at the banks general meetings. The only bank that will pay dividends is Noble Bank: shareholders have already approved a payout of PLN 0.21 per share, which entails gross dividend yield of 7.1%. The date of record is 10 April. The no-dividends recommendation of Bank Handlowy's Management came as a surprise. We expected to see half of FY2008 profits paid out as dividends. Volumes in the sector In February, the loan portfolio increased by 37.4% y/y (47% for retail loans and 28% for corporate loans). At the same time, deposits increased by almost 20% y/y (household deposits by 25% y/y, corporate deposits by 5% y/y). The loans/deposits ratio increased to 114% from 113% a month earlier. This increase is mostly a consequence of the revaluation of FX loans. This is why the portfolio of FX loans is expanding. New zloty loans are clearly decelerating (from 20% y/y at the end of 2008 to 17% y/y now). Zloty loans increased by 1.1% q/q vs. 3% q/q at the end of 2008 and 6% q/q at the end of September. Lending is slowing down, albeit this is obscured by the low value of the zloty. During February, the loan portfolio increased by PLN 14.7bn, of which PLN 11.5bn was in FX loans and PLN 3.2bn in zloty loans. Adjusted for currency revaluation, the portfolio expanded by less than PLN 3.8bn. Household deposits remain strong. We believe that they will continue to drive growth. If such growth rates persist through the end of H109, we may need to revise our projections. The retail deposit portfolio increased by PLN 9.5bn, after a PLN 9.8bn increase in January. Of this, PLN 9.2bn was in zloty deposits, and only PLN 365m in currency deposits. We see some FX deposits being converted into zloty deposits; households are reducing their currency exposure. At a constant exchange rate (assuming a 4.9% depreciation of the zloty vs. the currency basket), the portfolio increased by over PLN 8bn. At the same time, the corporate deposit portfolio shrunk once again (by PLN 2.2bn, after a PLN 4.2bn decline in January). Zloty deposits decreased by almost PLN 3bn. The FX portfolio increased, due to revaluation and a slight increase in actual deposits. The Y/Y growth rate remained at 5% (5.2% y/y in January). In Q1, a seasonal decline in corporate deposits can be expected. In 2008, deposits did not start growing until April. At a constant exchange rate, deposits increased by ca. PLN 5.7bn, which means that they are expanding faster than loans. Although the PLN strengthened vs. the CHF and the EUR in February, towards the end of the month its value dropped again. We will therefore not see a positive impact of a stronger zloty on bank balance sheets (loans, risk weighted assets, FX loans / total loans). The PLN depreciated by ca. 1% vs. the EUR, but strengthened by ca. 1% vs. the CHF. Retail mortgage loans Retail mortgages increased by PLN 8.6bn, of which ca. PLN 7bn was due to the revaluation of FX loans. Thus, the real increase in the portfolio was PLN 1.55bn, which is much less than in the preceding months (PLN 1.8bn in January, PLN 2.7bn in December, and PLN 3.8bn per month in 2008 on average). All in all, the mortgage loan portfolio increased by 61.5% y/y in February, but with the exchange rate held constant, the increase was 33% y/y. We reiterate our forecast of PLN 25 30bn in new mortgage loans in FY2009. We believe that in the first two months of the year, banks disbursed over PLN 4bn in mortgages. This entails a 10 12% increase in retail mortgages in FY2009 (assuming CHF/PLN exchange rate of , i.e. from the end of 2008). At the end of March, the CHF/PLN exchange rate was , i.e. the zloty appreciated by a mere 1%. As a result, the mortgage loan portfolio will shrink by ca. PLN 1.7bn. 2 April

12 Naturally, due to the appreciation of the PLN the share of FX loans in total loans will decline, but so far the appreciation of the zloty has been merely symbolic. NPLs NPLs are on the rise across the sector. They increased by PLN 2.2bn in February, of which slightly less than PLN 0.8bn was in the retail segment. The NPL/total loan ratio increased to 4.8% from 4.5% in January (to 3.6% from 3.5% for households and to 6.7% from 6.2% for corporations). NPLs increased by 32% y/y (vs. 22% y/y in January). We expect NPL growth to accelerate in FY2009. Corporate NPLs will double and household NPLs will increase by 40% y/ y. Growth will be driven by a base effect (in 2008, especially until the end of Q3 08, the NPL portfolio did not expand significantly). We believe that NPLs will be growing fairly fast in Q1 09 in nominal terms, due, inter alia, to the turmoil caused by FX derivatives. Loan quality deteriorates The share of mortgages in default increased from 0.28% at the end of October to 0.78% at the end of February in terms of value, and from 0.24% to 0.49% in terms of the number of the loans. In contrast to earlier trends, highest growth was observed in the case of FX mortgages (from 0.15% to 0.44% in terms of the number of loans and from 0.17% to 0.61% in terms of value). Previously, NPLs increased mostly in the case of zloty loans. For zloty-denominated loans, the increases were from 0.42% to 0.56% and from 0.77% to 1.16%, respectively. According to A. Topiński, the Chief Economist at the Bureau of Credit Information, the macroeconomic scenarios that currently appear likely suggest that NPLs will increase to ca % of total loans (in value). NPLs are growing fast, but this is still a small-scale problem. The biggest problems are faced by borrowers who took out mortgage loans when the zloty was strong. They may be hard-pressed now. An NPL/gross loans ratio of 2.5% is in line with our projections for the sector. It should be stressed that despite the fact that the ratio for mortgages increased several-fold, it is still at the lowest level among all the loans in the sector. Nonetheless, if NPLs rise quickly, provisions will have to be created quickly. The banks would prefer to see NPLs rise gradually over time, which would make its possible for losses to be absorbed by the increasing operating income. Losses on FX derivatives According to the Financial Supervision Authority, valuation losses on transactions involving FX options amounted to ca. PLN 9bn as of February 13; in case of the other FX derivatives, the losses were ca. PLN 7bn (forwards) and PLN 2bn (swaps). Approximately 80-85% of companies that transacted in derivatives should not incur any losses, because they used them to hedge export revenues. Speculators amount to fewer than 10% of all the companies involved, and the costs incurred by the banks pose no threat to their solvency. Investors should welcome the news that the scale of the losses and the number of speculators are much lower than the press has been reporting. It should be remember that valuation losses do not entail losses for a company that used these instruments for hedging only. For such companies, the risk lies in lower volumes of the hedged export sales, due to the recession which is engulfing foreign markets. This should not be a very big effect, however. On February 13, the EUR/PLN exchange rate was , at the end of March, it was Valuation losses increased after the KNF made its estimate on February 13, due to the end-of-march depreciation of the PLN vs. the EUR. Unfortunately, end of a quarter is the time when companies settle big tranches of derivatives. This has a negative impact on foreign exchange rates. We estimate, using KNF s data, that the total valuation loss on all contracts was ca. PLN 19bn at EUR/PLN of (assuming that no contracts were closed and settled between KNF s release and quarter-end). We believe that at this exchange rate level, the banks total write-downs should amount to PLN 1bn, on the assumption that the banks will create provisions for a similar share of transactions as in Q4 2008, and that the KNF is right about the scale of speculation. This is slightly less than the charges on account of increased counterparty risk and unsettled client transactions in Q earnings. According to the data released by the biggest banks and the banks that played actively in this market, ca. PLN 1.1bn was written down. Write-downs could be more limited in scale, however, because during the quarter many companies reached agreements with banks, under which their liabilities were restructured (converted into loans, payments spread out, aligned them with exports cash flows). Derivatives converted into loans More and more banks are offering companies the option of converting their FX derivative liabilities to long-term loans, which could be the only method of avoiding bankruptcy. Mr. Wojciech Kwaśniak, the former head of banking supervision, criticizes the idea of state guarantees for loans converted from FX option liabilities. For the taxpayer, this would be a risk. Banks offer the option of such a conversion to companies whose prospects look good despite their current financial problems. Moreover, such clients could get additional benefits (grace periods etc.) What the banks are doing is helpful and it helps to minimize the negative impact on the bank as well as the company. However, some of the risks related to the options now become credit risks. It can be expected that not all the loans of this type will be repaid. 2 April

13 Capital adequacy ratio According to the press, the KNF and the foreign regulators suggest ever more frequently that subordinated debt should not be counted in the calculation of the capital adequacy ratio. The KNF wants the Polish banks to have their capital adequacy ratios at 10% or higher. In the recent years, the banks granted loans and paid dividends, which caused their aggregate capital adequacy ratio to contract quickly, from 15% to 11% in three years. The sector s aggregate capital adequacy ratio is above 10%. The fact that it has contracted in the past few years does not mean that banks have been doing something wrong. Rather, the banks that did have their capital adequacy ratios at 15% should be deemed very inefficient. Only a few banks have low capital adequacy ratios now. The Polish banks make very limited use of subordinated debt. We believe that it will take a long time for regulators worldwide to introduce changes that would exclude subordinated debt from capital adequacy ratio calculations. This will happen when the storm that is engulfing banks is over. This will, however, be already in the post-crisis world. KNF could impose a higher capital adequacy ratio requirement The Financial Supervision Authority (KNF) is expecting the banks to create an equity buffer at least 2pp above the 8% capital adequacy requirement. In the future, this higher level may be enshrined in the law. Bad news for the banks. It means that more equity will be needed to finance operations of the same size, i.e. profitability will be lower. At the same time, it should be remembered that all the banks in our coverage universe except for Kredyt Bank had a capital adequacy ratio of above 10%. If, however, 10% becomes the legal floor, the banks will want to maintain a security buffer vs. this level. In some cases, a share offering would be needed. The minimum level of Tier 1 capital adequacy ratio as per EU regulations is 6%, and Tier 2 cannot exceed half of Tier 2. We believe that the KNF is being very conservative. A legal change in the capital adequacy ratio entails a fundamental change in the banks operations. It requires time. It may turn out that the new, higher requirements will be put in place already after the fact. KNF: banks cannot hike margins The Financial Supervision Authority (KNF) responded to the declarations of some banks that they will verify the value of properties that secures mortgage loans. When their value is found to have shrunk, the banks present customers with such options as partial repayment, additional collateral or an increase in the margin (by 0.5% at Polbank). The KNF reminds the banks that such actions violate the equality of rights of the parties to an agreement. The KNF believes such actions could be indicative of substandard credit risk management. Such banks will be monitored, especially those with a high risk portfolios. The Banks are looking for a way out of the tough situation. The cost of financing has increased significantly. Long term loans (frequently for 30 years, although the average tenor is 7 10 years) are financed with short-term liabilities. When the banks cut their margins during the previous cycle, they did not anticipate an increase in financing costs. The KNF has cited several rightful arguments, but it has forgotten about one issue. Clients taking out mortgage loans were made aware of the risk involved in FX borrowing. They had to accept the fact that there will be gains and losses throughout the duration of their loans. They did receive a piece of paper with "stress tests. It appears the banks themselves failed to consider these. For now, Polbank was the first to act. It is not, however, subject to the Polish banking law (it is a division of a Greek bank, operating under the EU passport). Moreover, repaying the loan at the current exchange rates would generated big losses for the client. And what will happen when the PLN appreciates? The banks are trying to gain some ground, but it is unclear whether they will be successful. NBP cuts interest rates by 25bps In the short term, this is a negative development for the banks. The banks are still fighting for a share of the clients' deposits; many term deposits opened in Q4'08 have not expired yet. Interest rate cuts have been very fast. Another cut is another blow to the banks short-term revenues. In the long term, this is a good development. It will have an impact, among other things, on the future cost of money (term deposit expirations, new APRs) and the cost of lending (lower installments will improve loan quality, the individual clients credit capacity will improve). NBP to launch new instruments to boost the banks liquidity and lending In its efforts to increase liquidity and entice the banks into lending, the NBP will enhance the current instruments and introduce new ones. The average indebtedness of the banks on account of operations included in the Trust Package is currently PLN 12.2bn (repo loans) and FX swaps (PLN 2.3bn). Moreover, the NBP injected the banking system with a sum exceeding PLN 8bn when it redeemed bonds early. Good news. What the NBP is doing will certainly help, though it is too early to say what the effects will be, as we do not know concrete plans yet. It seems all but certain, however, that the reserve requirement will be cut (the NBP is currently analyzing the consequences of such a move). The President of the NBP said earlier that the central bank will consider additional ways of improving the liquidity of the banking sector, including an extension of repo financing from three to six months. 2 April

14 Banks deposit billions with the NBP again On Friday, the NBP collected PLN 16.5bn from the interbank market through a cash bond offering. The demand reached PLN 48bn, but, according to economic commentators, this amount was inflated because the banks expected a high reduction rate in the process of share allocation. Indeed, the reduction rate reached 65%. The interest on one-week deposits is the same as the NBP reference rate, i.e. 3.75%. Because the NBP reduced the supply of bonds a month ago, commercial banks have to find other ways of depositing their surpluses (very short term lending to other banks, or deposits with the central bank at the deposit rate of 2.25%). Another solution is buying bonds issued by the Ministry of the Treasury. We believe it is too early for the surplus to end up in the credit market. We believe the demand for national debt will increase instead. Big banks are ending the War for Deposits? PKO BP, BZ WBK and ING BSK can no longer be found on the lists of banks that have the most attractive savings offers". The war for deposits continues, however, mostly because of the smaller banks, who previously used to aggressively promote loans. Currently, Getin Bank and Polbank pay the highest APRs on deposits two banks that as recently as in the fall of 2008 were among the most active players in the mortgage market. Nonetheless, interest rates on some of the deposits offered by the big banks still exceed the WIBOR. We believe that the War for Deposits will be abating, but we need to see the zloty strengthen and the banks' surplus of funds to expand (lower loans/deposits ratio, surplus liquidity). ZBP forecasts sector-wide loan portfolio growth at 7% in FY2009 The Polish Banks Union (ZBP) estimates that lending to the non-financial sector will increase by 7% in 2009, reaching PLN 642m. Household loans could increase at a double-digit rate, and corporate loans by 2-3%. According to the data ZBP presented at the end of 2008, total loans amounted to PLN 599bn (+35.8% y/y). These expectations are optimistic compared to ours; we expect the gross loan portfolio to contract, which means that the decline in net loans should be somewhat greater (higher NPL write-downs). We believe household loans will increase by ca. 7 8%, but corporate loans will decline (13.5% contraction in the portfolio), as banks refuse to renew credit lines and withhold investment loans. ZBP s forecasts are based on net loans. Lending breakdown? According to the President of the Polish Banks Union (ZBP), lending could break down altogether. The government needs to intervene by amending the appropriate laws. This can already be seen in mortgages: in January, only 11k were granted, of which 1k are loans with the state subsidy. In 2008, over 20k mortgages were being granted each month on average. Last year, the total was 290k; this year we can expect 200,000 at most. ZBP is hoping that the state subsidy program can be made more elastic. We reiterate our forecast that PLN 25 30bn worth of mortgages will be extended in PLN 30bn and 120k loans entails average loan value of PLN 250k, i.e. lower than before. We believe these forecasts are safe. There is upside potential. Demand for loans is decreasing The decrease in the demand for loans is becoming clear, says Mr. Józef Sobota, the head of NBP s Statistics Department. According to the data on newly-signed loans, lending growth will slow down. M3 money supply increased by 1.4% m/m in February, to PLN 678.4bn. The value of loans granted to households increased by 2.7% m/m, and the value of corporate loans by 1.9% m/m. We expect only a slight increase in lending in 2009, especially in household lending. No more 0% APRs at retailers Retail networks have stopped offering such deals to customers due to their increased cost (bank fees). Retailers included the cost of the loan in their mark-up on goods sold within this system. At the same time, the banks did not charge them high fees. Now, consumer loans are changing the way other loans are: the banks prices are going up and their requirements are tightening as the cost of financing and of credit risk goes up. Limited income from consumer loans? According to the banks, the cap on maximum interest rates charged on loans stemming from the anti-usury law may lead to a dramatic slowdown in consumer finance lending. As many as 75% of the biggest commercial banks surveyed by the NBP foresee further tightening in lending standards this year, coupled with a small decrease in the demand for consumer loans. The key factors that limit loan supply is the cost of financing, which remains high, and the increase in credit risk. If NBP s interest rates continue falling, such loans will become unprofitable. The current APR cap is 22%. High cost of financing for FX mortgages The banks that used CIRS to hedge their FX loan portfolios must use some of their client deposits to increase their own deposits with the banks that issued them these instruments. This limits lending and pushes the cost of financing up. Some of the banks admit this is the reason 2 April

15 why they reduced FX lending. The most hard-pressed banks are these that must roll over significant amounts of hedges in the near future. The full scale of the problem become apparent in October. This will result in reduced lending and lower interest margins. Polish banks set to incur a loss of PLN 3bn due to the increase in the cost of financing and credit risk? The CEO of PKO BP, Mr. J. Pruski, told the Senate Finance Committee that the Polish banking sector could incur an aggregate loss of PLN 2-3bn in 2009 due to the increase in the cost of financing and credit risk. Thus, not only would the PLN 15bn profit earned in 2008 be consumed, but there would be an outright loss as well. Mr. Pruski believes that if the situation in these two areas remains strained, the banks may have insufficient equity in He believes anti-crisis measures should focus on increasing money supply, decreasing interest rates and the cost of deposits, and the creation of a system of State Treasury guarantees. This is quite controversial, and realistic only if the bleakest scenario plays out (and that includes lack of reaction from the state, the regulators and the strategic investors). We do not think the Polish banking sector as a whole will incur a loss, although a few banks may. 30.3m payment cards across the sector The Poles already have 30.3m cards (+14.3% y/y in 2008). The value of the transactions is growing as well (+12% y/y), although this is the slowest growth rate ever. Growth is still the fastest in credit cards. There were 9.4m of them at the end of the year (+20% y/y). Credit cards account for 31% of all the cards issued, but only 13.4% of all transactions (9% value-wise). Growth will slow down even further this year. ATM network expands by 2,000 in 2008 We have not seen such an increase since At the end of the year, there were 13,600 ATMs in Poland. They are added as demand for ATM services increases. Last year, 635m ATM transactions took place (+11% y/y), for a total of PLN 232bn (+6% y/y). ATM networks expand as the branch networks do. Transaction revenues will be among the few income lines that will grow this year. IDM SA to buy a bank? IDM SA, a brokerage, received several offers to purchase bank shares at attractive prices. From what its representatives said on Tuesday, it appears that the Company will chose not to build a bank from scratch. There were 5-10 offers. Most of them are based on the assumption that the acquired bank will be injected with capital. The company assumes that the transaction could be spread out in time, and IDM SA could start by buying a minority stake. It will have to be a small bank, certainly not a listed one. Raiffeisen Bank Polska: earnings The Bank had PLN 315m net income in 2008 (+5% y/y). Its Q4 08 net income was PLN 74.3m. Its loan portfolio expanded by 30.4% y/y, reaching PLN 16.6bn, while the deposit portfolio grew by 26.4%, to PLN 15bn. Assets stood at PLN 24.1bn (+39% y/y). The cost/income ratio was 53.8%, and the ROE, 20.2%. Provisions created in Q4 08 amounted to PLN 152.5m, i.e. twice as much as in The impact of options was not revealed. After a capital injection (PLN 245m), the capital adequacy ratio reached 10.1%; after Q3'08, it stood at 9.4%. Sarasin opens a branch in Poland The Bank, controlled by the Dutch Rabobank group, wants to become recognizable and to establish itself as a leading financial advisor. It is the biggest Swiss private bank, specializing in asset management for individual and institutional clients, as well as in investment funds. At year-end 2008, its deposits stood at CHF 9.7bn. A market curiosity. Will changes in BGK's operations actually bring any improvements? The legal changes aiming to increase the activity of the state-owned BGK bank as far as guarantees and increasing money supply for businesses are concerned may fail to bring the desired effect. The proposed changes include a provision under which BGK is not bound by the general requirements of prudence the Polish banking law foresees. Thus, BGK will not have to examine the clients creditworthiness, sharing the risk with the other bank. This can slow the entire guarantee-granting procedure down. We reiterate our view that the changes are wellintentioned, we are awaiting operational results. 68.3% of Poles have a personal account According to Money Track, 68.3% of people in Poland have a personal account with a bank. 53.7% claim to have no savings. Among the others, 29.5% are putting money aside for emergencies; 7.6% for future investment. 67.8% see not chances for their material situation to improve. The potential is there to increase the penetration of various banking products. At the time of the crisis, however, this will be difficult, as the confidence in the sector is declining. 2 April

16 Bank Pocztowy to double loan portfolio in 2 years, hopes for a capital injection BP has the funds needed to double its loan portfolio; according to the current plans, this should take place within 2 years. During that time, the Bank would like to see a capital injection, said a VP. Currently, its capital adequacy ratio is ca. 19%, and the loans/assets and loans/deposits ratios do not exceed 35%. BP s loan portfolio currently stands at PLN 1bn. It cannot be doubled without a capital injection. At the end of 2008, retail deposits amounted to PLN 1bn, and retail loans to PLN 527m. In 2008, loans increased by 31%, and deposits by 20%. In 2009, the Bank would like to grant PLN 550bn worth of retail loans, of which half should be in mortgage loans. Not a threat to the biggest banks, but always an increase in competition. Raiffeisen no longer granting CHF loans Raiffeisen International Bank Holding has stopped granting CHF-denominated loans in Poland, Romania, Croatia and Hungary and it suspended its mortgage business in Ukraine. In addition, a freeze has been put on hiring and some branches in Russia and Slovakia are set to be shut down. The Bank is considering the ways in which it could strengthen is equity, and the equity of its CEE subsidiaries. The CEO said that the Bank could get funds from the EBRD and the EBI. He believes that the financial crisis will last three years. Few banks are still granting foreign currency loans. EUR-denominated loans could be the next wave, but it will not come until Poland's prospects for joining the euro zone become clear and the turmoil in the international financial markets subsides. Polbank yields to KNF pressure Mortgage loan renegotiations with 1,000 clients have been suspended. The bank asked the Financial Supervision Authority (KNF) for a clarification of its recommendations for mortgages. The Management claim that they have been following the existing recommendations, which included a call to banks to monitor the value of the property that secures mortgage loans, Seeing the KNF s firm stance, the other banks may hesitate before they follow in Polbank s footsteps. Bad news for shareholders, as it means that it will not be possible to improve the margin on the existing loan portfolio, at a time when the cost of financing is much higher than earlier. NBP's currency swaps have spoiled the market? Several months ago, the NBP offered banks foreign currency swaps enabling them to finance EUR and CHF lending. The central bank, however, accepts deposits from banks, paying interest based on the deposit rate (currently 2.5%) rather than the WIBOR (ca. 4.3%). The foreign players take advantage of the situation and adjust their pricing to NBP s, which increases the cost of financing for CHF and EUR lending. This will have a big impact on the banks interest margin, especially in the case of those with significant exposure to FX loans and without direct sources of currency financing. The impact will vary by the bank, depending on when the swaps mature, which has not been disclosed. The need to refinance the portfolios of FX mortgages extended during the lending boom may lead to losses. BPH: Agreement with trade unions The Management and the trade unions reached an agreement on group layoffs procedures. The layoffs will be introduced gradually until July 31; the maximum number of redundancies is 488. There will be training programs for the employees being laid off as well as redundancy payments (varied by seniority). We are awaiting information on the restructuring reserve. Strong pressure on the Bank s Q1 09 earnings. A restructuring reserve for almost 500 employees will have to be created. BPH: Supervisory Board member resigns Peter Franklin resigned as Supervisory Board member. BPH: GEMB negotiating group layoffs of up to 846 people The Bank, which is set to merge with BPH in Q3'09, has decided to carry out group layoffs, encompassing as many as 18% of employees (846 out of 4735) before the end of August. The Bank argues that the layoffs are necessary to keep the business in a good condition, protect it from the impact of unfavorable market conditions and to achieve business objectives. GEMB wants to cut its costs by 10-12% y/y not merely through layoffs, but also through cost-cutting measures. The new plan of the merger with BPH will be presented to the Financial Supervision Authority in Q2. Let s wait till we see it. A new strategy will be published as well. The previous one was prepared based on macroeconomic assumptions which have since become unrealistic. Getin Holding: Getin collected PLN 1.3bn in retail deposits in January In January, Getin Bank collected retail deposits totaling PLN 1.3bn. Sales were 20% higher than a year earlier. Good news. We are worried, however, that Getin Holding s FY2009 earnings will be heavily impacted by the high cost of financing and refinancing of the FX mortgage loan portfolio (with expensive deposits and swaps, respectively), as well as by the costs of credit risk (especially in consumer loans). 2 April

17 Getin Holding: DomBank picks up mortgage lending After extending mortgage loans worth just PLN 30m in December and January each (record sales in June 2008 totaled PLN 380m, monthly sales last year averaged PLN 200m), in February, DomBank recorded an increase in mortgage lending to PLN 74m. March is looking better still, with PLN 150m-worth of loan applications already filed. In spite of that pickup, the bank is downsizing its staff. Of the 200 employees, half work as loan officers whose salaries depend on sales performance, and who will not be affected by the job cuts. However, 20% of back-office staff will be let go. The pickup in lending is owed to successful deposit acquisition. All in all, loan growth this year is correlated with the level of savings set aside by Polish households and businesses. Getin Holding: earnings to improve in 2009? Mr. Leszek Czarnecki said that Getin Holding's earnings might improve in 2009 vs He said he would not take part in the share buyback exercise that is currently being planned. At the end of March, GH's shareholders will vote on the proposal to expand the buyback program from 4m shares to 50m shares. For sure, Getin International will not be floated on the WSE this year. as the situation in Russia and the Ukraine is much worse than in Poland. GH will wait at least until the economic trends reverse. A merger of Getin Bank and Noble Bank is currently being prepared. KNF s approval is still to come. The full operational merger is planned for September We believe Getin Holding will find it difficult to deliver on this earnings promise. The key problem will be the cost of financing (across the group) and the cost of risk in Getin Bank s consumer finance division. New loan volumes will be lower, too. Getin Holding: Czarnecki to sell Noble-Getin? Leszek Czarnecki, the main shareholder in Getin Holding, said that he might want to sell the bank that will be created by the merger of Noble Bank and Getin Bank. There are no bids for now, and no negotiations are being held. Getin Holding s Mr. Wiza denied that the Bank might be up for sale. On the contrary, the Noble Bank - Getin Bank merger is supposed to make acquisitions possible. Nobody wants to say that the bank will be sold right away. The bank s representative seems to have reacted a bit nervously, all the more so that the owner himself says that no negotiations are being conducted and that no bids have been submitted. To be sure, GB and NB claim that the merger will help them carry out further acquisitions. Nonetheless, the merged bank could still be sold. When Mr. Czarnecki said what he said he was looking far ahead. He did not want to close any doors off. Moreover, he was responding to a question, which may have been a leading question. Getin Holding: Proposal to expand buyback program The effort would be capped at 50m shares at a maximum per-share price of PLN 5 (PLN 250m total). The representatives of the Bank argue that they want to have an emergency exit in case the situation in the market changes. However, the Financial Supervision Authority (KNF) may object, as it wants the banks to increase their security buffers and attract additional capital. GH assures that its capital adequacy ratio remains at a high, safe level. 50m shares is over 7% of all shares and 22% of the freefloat. It is hard to say how realistic such an exercise is and what its objectives could be. Noble Bank: Dividends from FY2008 profits Despite the Management s recommendation of PLN 99m in dividends, the main shareholder, Getin Holding, voted in favor of lower dividends (PLN 45.2m, 29% of consolidated FY2008 income). The change is due to a letter from the KNF which recommended that dividends be lowered. The new DPS is PLN 0.21, which, given the current market valuation of PLN 2.95 per share, entails gross dividend yield of almost 7.1%.The date of record is set at April 10, with payout on April 30, Noble Bank: FX loan financing is not a problem The CEO of Noble Bank denied that the reason for the merger with Getin Bank is problems with the refinancing of foreign currency loans. Mr. Augustyniak said that the end of 2009 and H will be the time when the greatest share of financial instruments will need to be rolled over. Approximately 25% of all swaps will expire within 6 months. Their cost is also going down, from the 200bps peak to ca. 150bps currently. The bank has enough funds for the PLN collateral that needs to be deposited with the Bank that provides swaps. According to recent calculations, the Bank will be able to do this even if the CHF/PLN exchange rate is 4.5. Moreover, 20% of all the savings of its customers is in foreign currencies (EUR and USD). The Bank stopped granting foreign-currency loans in October, and the share of FX loans fell to 80%. The Bank s margins and fees have been much higher than elsewhere in the sector, and likewise for the higher buy/sell spread for foreign currencies. The portfolio will remain profitable even as the cost of financing goes up. We believe the banks that operate in the mass market face greater problems: margins were lower, but the cost of financing is the same. Nonetheless, Noble Bank will see its interest margin fall. In addition to the cost of the swaps, the "War for Deposits" has pushed to cost of client deposits up. 2 April

18 Analyst: Marta Jeżew ska Last Recommendation: Net interest income % % % Number of shares (m) 73.0 Interest margin 3.5% 3.3% 2.7% 2.7% MC (current price) Revenue f/banking oper % % % Free float 29.5% Operating income % % % Pre-tax income % % % Net income % % % ROE 23.0% 18.4% 3.3% 7.2% Price change: 1 month -0.6% P/E Price change: 6 month -56.0% P/BV Price change: 12 month -63.4% D/PS Max (52 w eek) Dyield (%) Min (52 w eek) BZ WBK BZ WBK (Buy) Current price: PLN 68.6 Target price: PLN At the end of 2008, the Bank s loans/deposits ratio stood at 82% (vs. 90% average for the Banks under our coverage and 120% for the sector as a whole). At the same time, the Bank has been maintaining its equity at a very safe level (assets/equity at 11.7, capital adequacy ratio at 10.74%). In order for its capital adequacy ratio to decline to 8%, its costs of risk would have to reach 6.7% (assuming Tie1 at the level from the end of the year). This is a higher threshold than at almost any other bank (Bank Handlowy, 12.6%, Pekao, 7.4%, ING BSK, 6.1%, PKO BP, 5.1%). The Bank will not be able to altogether avoid the impact of the difficult macroeconomic situation (high cost of risk, decline in corporate loan and deposit volumes, further decline in equity market income, pressure on interest margin), but we believe that it will weather these difficulties thanks to its excellent balance sheet and high cost-effectiveness. In addition, it is very well poised to take advantage of a potential improvement (here, cost-effectiveness plays a role again, as does its high diversification). We expect significant market share polarization in the corporate segment. Recently, BZ WBK has been receiving accolades for the quality of its services in this segment. Moreover, with its excess of deposits over loans, it will be able to meet the corporate clients requirements, expecting them to reciprocate by using its services exclusively. The market has already discounted a negative scenario for BZ WBK, but it is not discounting the leverage that will be available when the tides turn. We are reiterating a buy rating. BZ WBK expands BZ WBK Partner franchise BZ WBK plans to open 100 BZ WBK Partner franchise branches in 2009, and rebrand existing Minibank franchise outlets. Earlier this month, the bank also announced that it was going to open up to fifteen own branches. Neither franchise expansion, nor rebranding, causes BZ WBK to incur direct expenses. Development of the bank s own sales network does, hence the cutback to just 15 new openings this year. Special meeting of shareholders called The Bank called a special meeting of shareholders for April April

19 Analyst: Marta Jeżew ska Last Recommendation: Net interest income % % % Number of shares (m) Interest margin 3.2% 3.3% 3.1% 3.1% MC (current price) Revenue f/banking oper % % % Free float 25.0% Operating income % % % Pre-tax income % % % Net income % % % ROE 15.0% 10.6% 5.5% 6.1% Price change: 1 month 5.9% P/E Price change: 6 month -42.0% P/BV Price change: 12 month -60.1% D/PS Max (52 w eek) 94.5 Dyield (%) Min (52 w eek) Bank Handlowy Handlowy (Hold) Current price: PLN 36 Target price: PLN 36.9 The Bank s Management will recommend that the entire FY2008 net profit be retained in equity, which is a negative surprise given that we have been expecting a payout of half of the profits. The Bank is maintaining a liquid balance sheet, and it was the first to introduce a group layoff program (already in Q1 2008). Nonetheless, its success hinges on how good the business in the corporate segment is, which means that its volumes will contract this year (both loans and deposits), which will lead to a contraction in revenues. The Bank is very exposed to credit risk, which will put further strain on pre-tax income. Bank Handlowy is trading with a 29% premium over ING BSK ( 09 P/BV of 0.8 vs. 0.6). We are downgrading our rating for the bank from accumulate to hold. Moody s downgrades rating Moody's lowered its long-term rating for BH's zloty and FX deposits from A2 to A3. The Bank's short-term credit rating was downgraded from P-1 to P-2. and the financial strength rating was affirmed at C-. The wave of downgrades continues. It is not over yet. Supervisory Board to recommend no dividends from FY2008 profits The Supervisory Board has recommended that no dividends be paid from FY2008 profits. A negative surprise. We believed BH was capable of paying out dividends, given its capital adequacy ratio, exposure to loans, liquidity (loans/deposits) and the leveraging of its capital by its assets. We expected PLN 2.29 per share in dividends 2 April

20 Analyst: Marta Jeżew ska Last Recommendation: Net interest income % % % Number of shares (m) 13.0 Interest margin 2.1% 1.9% 1.7% 1.9% MC (current price) Revenue f/banking oper % % % Free float 19.6% Operating income % % % Pre-tax income % % % Net income % % % ROE 16.6% 11.1% 1.9% 8.9% Price change: 1 month 14.7% P/E Price change: 6 month -56.8% P/BV Price change: 12 month -60.6% D/PS Max (52 w eek) Dyield (%) Min (52 w eek) ING BSK ING BSK (Buy) Current price: PLN Target price: PLN At present, the bank is trading at 09 P/BV of 0.6. which makes it one of the cheapest banks listed on the WSE. It is trading with a big discount vs. Bank Handlowy (0.8), which is also not going to pay dividends. Only Bank Millennium (0.6) and Kredyt Bank (0.5) are better-priced. Just like Bank Handlowy, the Bank has a strong corporate lending arm, but its deposits rely on retail customers who will be driving the portfolio this year. We are expecting the pressure on ING BSK's interest margin to be relatively lower than at peers due to: (i) the fact that it does not need to attract deposits with its low loans/deposits ratio, (ii) its pricing on deposits used to be high, which entails lower relative growth. The Bank will be exposed to corporate credit risk, which has been factored into our forecasts. We are reiterating a buy rating. CEO interview Mr. Brunon Bartkiewicz said in an interview for the press that the Bank's interest income may fall in H1'09 due to the shrinking margins on deposits. Later in the year, however, the Savings War should abate, and interest income should increase. Fee income will also fall due to the slowdown in lending and the meager sales of investment fund units. With this in mind, the Management introduced a cost-cutting program in Q4'08, with a focus on containing expansionrelated expenses. Employment could be cut, although no group layoffs have taken place yet. In Q1 09, the Bank reclassified its bond holdings, so that the loss incurred in Q4 08 is not exacerbated. Nonetheless, in the first months of the year, the Bank did bear the cost of the increased default risk of the Polish government. The CEO expects further write-downs on account of the risks associated with FX derivatives. Management to recommend no dividends from FY2008 profits The Management it recommending the shareholders that the entire FY2008 net profit be retained. Shareholders are meeting on April 3. In line with expectations. Hoping the number of cards will increase by 200,000 in FY2009 Last year, 226,000 credit and debit cards were added. ING has so far issued 2m cards, including 1.6m debit cards and 278k credit cards. The total value of transactions in FY2008 was PLN 103m (+20% y/y). 2 April

21 Kredyt Bank (Sell) Current price: PLN 5.9 Target price: PLN 4.1 Analyst: Marta Jeżew ska Last Recommendation: Net interest income % % % Number of shares (m) Interest margin 3.5% 3.2% 2.6% 2.7% MC (current price) Revenue f/banking oper % % % Free float 9.4% Operating income % % % Pre-tax income % % % Net income % % % ROE 17.9% 13.2% 0.4% 1.8% Price change: 1 month 20.4% P/E Price change: 6 month -54.0% P/BV Price change: 12 month -73.2% D/PS Max (52 w eek) 22.4 Dyield (%) Min (52 w eek) Kredyt Bank The news we are hearing about Kredyt Bank are in line with our expectations. The Bank has altogether dropped foreign-currency loans for retail clients (mortgages) and SMEs. The depreciation of the zloty entails revaluation of over half of its loan portfolio. Other negative news concern the significant slowdown in the lending business. The high loans/ deposits ratio results in higher financing costs, especially if the Bank needs to diversify its sources of financing. At present, PLN 11bn of its liabilities (28% of the assets) is wholesale financing from the subsidiaries of its strategic investor. We are reiterating a sell rating KBC ready to save Kredyt Bank if need be Jan Vanhevel, CEO of KBC s Central and Eastern European operations, told Rzeczpospolita that KBC was determined to keep its Polish investments. Kredyt Bank is going to focus on prudently expanding its loan portfolio. Mr. Vanhevel says that aid received from the Belgian government was not conditioned on KBC cutting back support for its subsidiaries, and that KBC is committed to providing assistance to Kredyt Bank if necessary. The potential impact of Kredyt Bank s problems on KBC outweighs the cost of additional funds. From the standpoint of shareholders, a capital injection in Kredyt Bank would not be beneficial because it would entail EPS dilution The fact that after a period of silence KBC has started to make comments to the Polish papers is significant. The current declaration may be instrumental in responding to the concerns of the market and the regulator. No more FX loans Kredyt Bank, owned by the Belgian KBC group, withdrew CHF- and EUR-denominated loans from its retail and SME offering. The loans in question were mortgage and consolidation loans offered to retail customers as well as those who use simplified accounting. The decision was motivated by the increase in risk associated with such loans due to the zloty depreciation and the situation in the international markets. The Bank s decision stems from its cautious approach to risk and conservative lending policies. This comes a tad late. Of all the banks in our coverage universe, KB is in the worst position. Over half of its total loan portfolio was denominated in foreign currencies at the end of 2008 (56%), of which PLN 10bn was in the Swiss franc (mortgage loans for retail clients) and PLN 2.7bn in other currencies (77% in EUR). As the zloty kept depreciating in January and February, the Bank had to face up to the expansion of its RWA. This did not put the 8% capital adequacy ratio threshold at risk (8.81% at the end of 2008), but it did reduce the security buffer. We believe that with equity at low levels vs. loans granted and with its big exposure to FX loans, KB's growth will be stumped in FY2009. Kredyt Bank denies that it has stopped granting loans According to newspapers, an internal memo mandated that KB' lending be reduced, supposedly due to an order from KBC. The Bank has denied this is the case. It claims that it continues to have the full support of its strategic investor and that its lending increased by 7.7% in the first two months of 2009, with the loan portfolio at PLN 30bn at the end of February. Kredyt Bank hopes to see its deposits expand at a double-digit rate in 2009; this does not have to be the case for loans. In February, the bank collected more deposits than in January. We believe there may be a grain of truth in what the newspapers are saying. The Bank has already officially withdrawn FX loans, both retail and corporate. It is rather unlikely that it will stop lending altogether, but a sharp reduction in lending is possible. The expansion of the portfolio to PLN 30bn entails adding PLN 3.3bn to net loans and PLN 2.34bn to gross loans. Since the end of the year, the CHF/PLN and EUR/PLN exchange rates increased by almost 12% The revaluation of 56% of the Bank's gross loan portfolio entails a PLN 1.85bn expansion since the end of This means the bank is still granting loans, but few and far between. 2 April

22 Rating lowered and withdrawn Fitch downgraded Kredyt Bank's individual rating to "D" from "C/D" while reiterating all the other ratings. According to the Agency, this decision reflects the deterioration in Poland s economic situation, which could lead to lower revenue and higher costs of risk for the Polish banks. Fitch believes that in this context, the Bank s equity is not quite as big as it could be should the negative scenario play out. At the same time, Fitch withdrew all the ratings and it will no longer issue them. KB announced on Monday that it had dissolved its agreement with Fitch, because in the near future it is not planning to seek long-term external financing, which requires ratings. We concur with Fitch. Our view on Kredyt Bank, as expressed in our March 5 report, is similar. 2 April

23 Analyst: Marta Jeżew ska Last Recommendation: Net interest income % % % Number of shares (m) Interest margin 2.8% 2.5% 2.0% 1.9% MC (current price) Revenue f/banking oper % % % Free float 34.5% Operating income % % % Pre-tax income % % % Net income % % % ROE 19.5% 15.5% 0.2% 2.7% Price change: 1 month 32.4% P/E Price change: 6 month -70.6% P/BV Price change: 12 month -78.8% D/PS Max (52 w eek) 8.7 Dyield (%) Min (52 w eek) Millennium Millennium (Hold) Current price: PLN 1.8 Target price: PLN 1.7 In the final days of the month, good developments (CHF strengthening, which impacts mortgages, and EUR strengthening, which impacts corporate clients' derivatives) got reversed again. Foreign exchange rates affect the structure of the balance sheet, the level of risk-weighted assets and loan write-downs. At the same time, little has improved in the macroeconomic environment. We believe that there is little upside potential in revenues. The market valuation has already discounted the cost-cutting plans. We would welcome zloty appreciation and indications of lower than forecasted credit risk charges in Q The share price has increased 30% since our last rating (March 5); we are downgrading our rating for the Bank from buy to hold. Share capital increase? In his address to the shareholders, the CEO said that while the bank does not need to increase its capital, all scenarios have to be taken into consideration in the present circumstances. Although these words have to be seen in context, the market interpreted them as a declaration to the effect that a share capital increase is possible, all the more so that some of the news services only cited a couple of sentences. We believe there is no risk of capital increase for the time being. Nonetheless, the Bank is extremely sensitive to the level of provisions. It is commendable that the Bank is prepared for all kinds of scenarios. UOKiK sues Millennium Competition watchdog UOKiK has sued Bank Millennium. It is questioning the clauses used by Millennium in its mortgage loan agreements. A UOKiK representative said that with this litigation, the agency continues actions launched last week, when it sued BRE Bank, questioning the clause contained in its mortgage loan agreements stating the bank can unilaterally change some of the provisions of the agreement. Millennium may not be the last bank to be sued by UOKiK. UOKiK is defending the public interest. Another institution capable of constricting the banks' freedom of movement. Loan from the strategic investor Bank Millennium took out a EUR 200m loan from BCP to finance its ongoing operations (almost PLN 900m at the current EUR/PLN exchange rate). The loan is due in April The Bank had one of the highest loans/deposits ratios of all the listed banks. In November, another foreign loan, but not from BCP, is due (CHF 555m, i.e. ca. PLN 1.6bn). The new loan will not be treated as subordinated debt. One of the objectives of the loan could be reducing the cost of refinancing the FX loan portfolio: instead of the expensive swaps, the Bank gets the funds directly in the foreign currency. Special meeting of shareholders Shareholders decided to allocate all of the FY2008 profit to reserves, which is in line with the earlier recommendation of the Bank's Management Board. 2 April

24 Analyst: Marta Jeżew ska Last Recommendation: Net interest income % % % Number of shares (m) Interest margin 3.6% 3.5% 3.2% 3.1% MC (current price) Revenue f/banking oper % % % Free float 36.7% Operating income % % % Pre-tax income % % % Net income % % % ROE 23.1% 23.0% 8.2% 10.6% Price change: 1 month 8.5% P/E Price change: 6 month -51.4% P/BV Price change: 12 month -58.6% D/PS Max (52 w eek) Dyield (%) Min (52 w eek) Pekao Pekao (Buy) Current price: PLN 83.3 Target price: PLN With its liquid balance sheet (loans/deposits at 91%), high capital adequacy ratio (11.1%), long position in foreign currencies (more FX deposits than liabilities), lack of exposure to FX mortgages and conservative approach to growth in the past few years, Pekao is an attractive investment. Its conservative approach to risk may result in lower provisions, but we remain cautious about this (cf. Ukraine, exposure to the corporate segment, consumer loans). The Bank s capital strength and its liquid balance sheet could help it rebuild the market shares it has lost. The Bank may remain a selective and pricey lender, but at the same time one that continues to lend when its peers cannot afford their riskweighted assets to expand. We are reiterating a buy rating. Management calls for earnings retention The Management decided to lower its recommendation on dividends from 2008 profits. In line with our long-term forecasts for Pekao, profits are to be retained in equity. On Ukrainian subsidiary UniCredit Bank Parkiet has a story on differences between the fourth-quarter earnings performance of the Ukrainian operations of Pekao versus PKO BP and Getin Holding. While the two latter banks recognized goodwill impairment losses and significant loan-loss reserves, Pekao did not (the Ukraine subsidiary was a greenfield project). We predict that the Ukrainian subsidiaries of Polish banks will generate high costs of risk this year. PKO BP and Getin Holding recognize positive goodwill on these operations, unlike Pekao. Pekao s cost of risk was lower than PKO BP s and Getin Holding s will be the real test of UniCredit Bank Ukraine s risk profile. We think that Pekao is going to create provisions against its Ukrainian exposure this year. Further, there might be charges against the book value of the Polish bank s interests in the subsidiary, which was reported as PLN m as of December 2008, is the situation in the Ukraine continues to deteriorate. Rating downgrade Standard & Poor's cut Pekao s rating to do A-/A-2 from A-/A-1 with a stable outlook following a downgrade of the bank s main shareholder, Unicredit, and reflecting the general expectation of an economic downturn in Central and Eastern Europe. Pekao negotiates with intermediaries Pekao is renegotiating commission fees it pays to financial brokers. It appears that it is offering much lower rates than have been in place until now. Pekao representatives admit that the bank is involved in negotiations, but they claim that this is a part of the process of implementing new rules, under which brokers will be much more involved in the lending process. It comes as no surprise that another bank is attempting to keep sales in its own network. Unfortunately, if the brokers were to face such a choice, they would do the same. Financial groups are becoming hermetic so as to be as effective as is possible in the unfavorable market environment. 2 April

25 Analyst: Marta Jeżew ska Last Recommendation: Net interest income % % % Number of shares (m) Interest margin 4.4% 5.0% 3.7% 3.7% MC (current price) Revenue f/banking oper % % % Free float 43.1% Operating income % % % Pre-tax income % % % Net income % % % ROE 26.4% 25.3% 7.3% 8.8% Price change: 1 month 10.5% P/E Price change: 6 month -51.3% P/BV Price change: 12 month -53.8% D/PS Max (52 w eek) 52.5 Dyield (%) Min (52 w eek) PKO BP PKO BP (Buy) Current price: PLN 21.4 Target price: PLN 29.6 PKO BP is currently in the best position to grab a piece of the expanding deposit cake. We believe that in 2009 we will see the Bank s share of retail deposits rise consistently. Unfortunately, its own actions exacerbated the war for savings", because its new deposit offering which, to be sure, had been promised last spring, before liquidity became a problem was launched right in the midst of the worldwide crisis, i.e. after the bankruptcy of Lehman Brothers. The Bank s loans/deposits ratio currently stands at 98%, due to the revaluation of the FX loan portfolio. We believe that the ratio will decrease to 91% over the year and then remain at this level in the long term. The Bank has good growth potential that stems from its strong exposure to the retail segment, limited exposure to the corporate segment, high operating efficiency (with cost/income ratio at 45%) and stable capital adequacy ratio (11.3%). One negative factor is its involvement in the Ukraine, which already in Q4'08 brought it PLN 246.3m in provision charges and a PLN write-off of goodwill 76.4m. In order for the Bank to eat up all of the operating surplus forecasted for FY2009 (PLN 3.9bn, -25% y/y), its costs of risk would have to reach 3.7%. We are reiterating a buy rating. Fees and commissions go up The Management has formally approved the decision to hike retail fees and commissions, including account management and bank transfer fees. The new pricelist will come into force in May and it will bring the Bank several dozen million zloty in additional income per quarter. This is the first change to PKO BP s fee schedule in three years. The Bank is claiming that its offering will nonetheless remain competitive compared to other players. Special meeting of shareholders called PKO BP called a special meeting of shareholders for April 6 to deal with changes to the Supervisory Board. Ms. Urszula Pałaszek is set to depart. Multiple bidders for AIG Bank Polska? Negotiations on the sale of AIG BP have reached the price-setting stage. PKO BP is negotiating the purchase, but according to Rzeczpospolita, Santander is a contender as well. This transaction is taking time. It was supposed to be closed several weeks ago. Santander s involvement comes as a surprise, we do not know whether it is really a serious bidder. It could, however, boost the price. We believe the takeover of AIG Bank Polska would be a good growth opportunity for PKO BP, enabling it to improve its market standing, as long as the price is good. Competition aims to seize savings from expired MaxLokata term deposits PKO BP s high-yield saving account, which managed to capture PLN 7.5bn in client savings (PLN 6.8bn after adjustment for early withdrawals), expired yesterday. Other banks took this into account when preparing their own new deposit offers, but PKO BP responded with its own offer addressed to the former MaxLokata clients, and is certain that it can retain at least PLN 2.2bn of the savings. The expiration of MaxLokata explains the recent surge in high-yield deposit offers. New Head of Retail Wojciech Kuryłek, new Head of retail banking at PKO BP, transferred to the bank from Amathus TFI. Earlier, he was CEO of BGK and chief economist at Kredyt Bank. 2 April

26 Gas & Oil, Chemicals US crude oil inventories still going up, demand strength still uncertain As the weeks of March progressed, we saw systematic increases in US petroleum inventories, driven primarily by low capacity utilization (82% on average) and higher imports (average daily imports up by 2.7% vs. February). There were some negative signals in the data on fuel demand (a clear, 8% drop in the consumption of distillates), but we do not believe that these data points mark watersheds (gasoline demand remained stable, with the y/y growth calculated for the past for weeks at only -1.4%). In the upcoming weeks, we should see a clearer picture of the strength of demand in the world's key fuel market, because the transportation season is slowly beginning. If the y/y growth rate does not become more negative, we will consider it very good news that could lead to further increases in petroleum prices. If the opposite is the case, price may fall below the USD 50/bbl threshold for good. US petroleum and gasoline inventories Jan 05 Apr 05 Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Jan 05 Apr 05 Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 US petroleum inventories (left) Brent crude price, USD/Bbl US gasoline inventories (left) gasoline price, USD/t Jan 05 Apr 05 Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jan 05 Apr 05 Jul 05 Oct 05 Jan 06 Apr 06 Jul 06 Oct 06 Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 petroleum inventories in days of consumption (excl. strategic reserves) gasoline inventories in days of consumption Source: BRE Bank Securities analysis based on US Department of Energy data 2 April

27 Ciech Ciech (Hold) Current price: PLN 23.9 Target price: PLN 34.2 Analyst: Kamil Kliszcz Last Recommendation: Revenues % % % Number of shares (m) 28.0 EBITDA % % % MC (current price) EBITDA margin 14.4% 12.5% 12.9% 13.0% EV (current price) EBIT % % % Free float 42.7% Net profit % % % P/E Price change: 1 month 44.6% P/CE Price change: 6 month -53.4% P/BV Price change: 12 month -70.0% EV/EBITDA Max (52 w eek) 88.7 Dyield (%) Min (52 w eek) 16.4 Ciech, just like most chemical companies listed on the WSE (ZAP, ZAT, Synthos) can consider March successful as far as its share price is concerned (+44% vs. +11% for the ). In our opinion, although a correction of the heavy losses seen in the previous months should not be surprising, it is hard to assume that Ciech's macroeconomic environment has improved for good vs. Q The Company did signal that its sales volumes in the organic segment were improving significantly (lower prices, cheaper zloty), but there are also signals that demand is weakening in the crucial soda segment. Ciech's share price would get a boost if the promised appendices are signed to loan agreements (concerning the breach of covenants and debt consolidation), but this could stretch into the next month. For now, we reiterate a neutral rating, but we do not preclude the possibility of upgrading it if Ciech s key product margins become more stable. Prosecution service to investigate the purchase of SWS After audits and expert opinions, the new Board decided to notify the public prosecution service of irregularities that accompanied the purchase of SWS, a German soda producer. These irregularities are alleged to have exposed Ciech to the risk of financial losses. The key charge is that the acquired company was not audited with proper care and that legal solutions were accepted which grant the previous owner so much power that Ciech is de facto unable to control SWS, despite holding a majority stake in the Company. As far as Ciech s shareholders are concerned, the complaint to the prosecution service does not matter that much, as it does not mean that the money that was spent can be retrieved. The SWS purchase was considered a costly mistake from the very start. What the new Board has disclosed confirms this view, but it does not change much. The important thing is that the issues related to the disadvantageous contracts with Mr. Jochen Ohm have been largely rectified and Ciech can now exercise full control over its German assets. Further CAPEX cuts are possible CEO Kunicki said that the Management will review investment plans; if the revised H1 earnings turn out unsatisfactory, costs and CAPEX expenses will be cut. The Management has said that the German and Romanian soda-producing subsidiaries, which had a very poor 2008, should break even this year. The picture looks bleaker in the organic segment, although Ciech still maintains that TDI sales volumes should increase significantly (as a consequence of investments that have been carried out), albeit at much lower margins. The CEO did stress that soda is not being sold below cost. Volume-wise, the situation looks worse in NPK fertilizers, where a Y/Y decline can be expected. CEO optimistic about Q1 09 results Yesterday, CEO Ryszard Kunicki told PAP that Ciech s Q1 09 earnings will be much better than in Q4 08, although they might be slightly lower year-on-year. In Q1 08, the Company had an EBIT of PLN 158m and net income of PLN 94.5m; in Q4'08, its EBIT was -PLN 6m, net income, -PLN There is, therefore, a huge gap between these. The CEO appears to have been somewhat over-optimistic in his suggestions. We believe, based on signals concerning January and February sales, that Ciech should be able to exceed PLN 100m in EBIT, including PLN 20-30m gain on the sale of the caverns. An operating income of PLN 80-90m (excluding caverns) would be very welcome news anyway. Ciech sells old HQ Yesterday, Ciech shareholders voted in favor of selling the company s former headquarters at Powązkowska St. in Warsaw. The asking price is PLN 25m. A tender will be called in April; the Company is hoping to close the transaction by the end of the year. Investors should be pleased with the proceeds. 2 April

28 Investor search is on Ciech, ZA Tarnów (ZAT), and ZA Kędzierzyn (ZAK) signed a multilateral agreement with Nafta Polska and its financial advisors (Raiffeisen, Lazard&Co, BZ WBK) and legal consultants, regulating the process of finding an investor or investors for these companies, including preparation, the RFQ procedure and subsequent negotiations to be led by Nafta Polska. The agreement is in line with earlier announcements by the State Treasury. Any significant developments resulting from it will materialize some time in the second half of the year. Ciech close to deals with banks CEO Ryszard Kunicki says that the negotiations with banks concerning restructuring and consolidation of the debt of Ciech Group companies are nearing completion, and that agreements with the banks will probably be signed by early May. Ciech is going to divest more subsidiaries than planned earlier (PTU, Polfa, Cheman, property at Powązkowska St. in Warsaw). The arrangements with banks will not doubt bring order to Ciech s finances and enable a more effective management of liquidity. The lenders will no doubt charge higher margins, but this is not surprising under the current circumstances. Investors should welcome the deals. Depending on margins ( bps) and the divestment timeframe, Ciech may incur debt service costs between PLN 100m and PLN 130m this year. 2 April

29 Analyst: Kamil Kliszcz Last Recommendation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 7.8% 1.1% 7.9% 6.3% EV (current price) EBIT % Free float 41.2% Net profit % P/E Price change: 1 month 51.9% P/CE Price change: 6 month -35.9% P/BV Price change: 12 month -53.7% EV/EBITDA Max (52 w eek) 35.6 Dyield (%) Min (52 w eek) Lotos Lotos (Buy) Current price: PLN 16.4 Target price: PLN 26.7 For the second consecutive month, Lotos shares outperformed the 20 index in March by rallying 54% vs. a 13% gain on the index. Lotos is now more than 120% up from its January low. We still see medium-term upside potential in the stock, but expect some investors to cash out in the near term due to several factors, which include expectations of weak first-quarter figures weighed down by a negative LIFO effect (ca. PLN -45m) and forex losses (a PLN 390m loss on a dollar loan and a PLN 163m loss on USD/PLN and EUR/USD exchange rate hedges). What is more, April could see delays with respect to the deadlines set in Lotos's tight maintenance schedule. In the quarters ahead, however, Lotos is poised to gradually improve both the quality, and the size of its earnings, and the good long-term outlook is further supported by upcoming amendments in strategicfuel-reserve laws. We are reiterating a buy rating on Lotos. Treasury quashes Orlen / Lotos merger rumors Deputy Treasury Minister Krzysztof Żuk denied that the Treasury was back to planning a merger of the two oil giants. It is very unlikely that such an operation will take place in the near future. Nafta Polska is standing by its position that Lotos can look for a strategic investor after completion of the 10+ upgrade program. Government drafts revolutionary new legislation on strategic reserves According to reports, the Ministry of the Economy is working on amendments to the legislation governing strategic liquid-fuel reserves. The bill, which is said to shift the burden of having to stock emergency stockpiles from oil companies to a government agency, is expected to be ready by June. It provides that the agency would buy existing reserves from the oil companies, using a loan from an international financial institution, in exchange for regular maintenance fees, as is the practice in Germany and Hungary. There is no doubt that such a change is good for both PKN Orlen and Lotos. It would reduce the influence of LIFO effects on EBIT amid volatile oil prices (the effects also take a toll on the non-moving strategic reserves), as well as unfreeze huge amounts of cash currently frozen in working capital (for Lotos, this would mean that it would not have to increase its working capital in 2011, after expected strong sales in 2010 which would necessitate higher allocations toward mandatory reserves). Recall that PKN and Lotos are required to maintain fuel reserves equal to 76 days of sales, partly in crude oil (ca. 65%), and partly in finished products (35%). The value of PKN s reserves is estimated at PLN billion, and Lotos s stockpiles are worth about PLN billion (the stockpiles as percentage of sales are relatively larger in case of Lotos due to high imports). The present timing would be good for the government to buy the reserves, whose value is low in line with oil prices. On the other hand, a major portion of these reserves (over 60%) was built up until 2006, at prices which, on average, were similar to the current prices. One could say that the remaining portion generated losses after oil prices fell, but this is already factored in the stock values of both oil giants. All we can do is wait and see whether the government takes concrete measures. So far, the Ministry has accelerated the legislative work to catch up with an upcoming EU directive which will require all member states to comply. Ministry confirms plans to take over strategic reserve maintenance Deputy Treasury Minister Krzysztof Żuk confirmed that the Ministry was working on regulations to take over maintenance of emergency fuel reserves from oil companies. The Ministry expects to make a breakthrough on this matter this year. Scheduled downtime started on March 13 As per earlier declarations, on March 13th, a 34-day-long downtime commenced at the Lotos refinery. It will encompass not just an inspection and upgrades of existing lines, but also an integration of the "old" refinery with the new plant being built under the '10+' program. Sales will 2 April

30 continue during that time thanks to accumulated inventories and external purchases. The maintenance will cost PLN 78m, divided proportionally between Q1 and Q2. The downtime had been announced earlier, and we took the estimated costs into account in our forecasts. We did notice, however, that the schedule is pretty tight and might be hard to meet. Nafta Polska to transfer Lotos shares to the Treasury by the end of 2009 According to Deputy Treasury Minister Mr. Krzysztof Żuk, Nafta Polska (a company dedicated to the privatization of the Polish chemical sector, fully controlled by the Treasury) will be dissolved by mid By the end of 2009, it will transfer to the Ministry its holdings in PKN Orlen (17.3%) and Lotos (51.9%). If Lotos shares are indeed transferred to the government, the company will not be able to permanently free itself from legal caps on management pay. As a reminder, it was suggested that, after Petrobaltic shares are transferred to Lotos around mid-2009, Nafta Polska's stake will decline below 50%, and the salary restrictions will no longer apply. Tender offer speculation Parkiet speculates that once the Treasury swaps its minority holdings in Petrobaltic for Lotos shares in H109, it may exceed the 66% ownership threshold which requires a tender offer for outstanding shares. We believe this is a very unlikely scenario. The size of the stock contribution should be determined based on valuation of both Petrobaltic and Lotos, using a proportional exchange ratio. We estimate the value of Lotos's current 69% stake in Petrobaltic at ca. 35% of its market cap, i.e. PLN 490m, which implies that the Treasury s stake is worth PLN 216m. Based on these estimations, it follows that 17.4m new shares should be issued, which would boost the Treasury s stake in Lotos to 64%, below the tender-offer threshold. For you reference, the per-share price of Lotos's stock was an average PLN 11 for the last 3 months and an average PLN 14.3 for the past 6 months. Biofuel targets will not be lowered The Ministry of the Economy rejected Lotos s demands that this year s 4.6% target for the share of biofuel components in fuel sales be reduced. The fuel producers have another idea for how to avoid costly investment in new fuel dispensers: to increase the share of biofuel sold through unmarked dispensers from the current 5% to 7-10%. This will be possible when a special EU directive comes into force in Poland, which could happen before H1'09 is over. However, these regulations may not be fully implemented in Poland before 2010, which may make it difficult for the companies to meet the annual biofuel targets. The amounts cited in the press as the necessary investment outlays (PLN 1bn, i.e. PLN 1-2m per gas station) are in our opinion very much exaggerated. This implies the existing stations would have to be fully overhauled. To be sure, the fuel would have to be sold from separate dispensers, but if worst comes to worst, the existing ones could be used. This seems possible at the bigger stations. A bigger problem for the fuel concerns is, we believe, the cost of the bio-components, which are currently more expensive than their petroleum equivalents. For now, it is too early to estimate the annual impact on refiners. Petrobaltic valuation in May According to an agreement between the Ministry of the State Treasury and a consultancy, the valuation of Petrobaltic is to be ready by May, and the process of transferring the Treasury s stake to Lotos as a contribution in-kind should be concluded before H1 09 is over. This confirms the schedule that has been previously made public. The key issue is the share exchange ratio, but the Ministry s last pronouncements that the Treasury s stake will not exceed 66% after the transaction should calm investors concerns. According to our estimates, the Treasury s stake in Lotos will increase to 64% after a placement of approximately 17m shares. Supervisory board appointment Lotos shareholders will vote on new Supervisory Board appointments during a special meeting on April 27th. The meeting was probably called to fill the vacancy left by Piotr Chajderowski, who is leaving to head Centralwings. Supervisory Board to choose new Management in May Krzysztof Żuk, Deputy Minister of the Treasury, said that in May the Supervisory Board of Lotos will consider the appointment of a new Management Board, seeing that the office term of the current one ends when the special meeting of shareholders approves the company's annual report (publication on April 28). At the same time, Mr. Żuk said that there are no reasons to criticize the current Management s work. He believes it will be able to competently pursue the excellent strategy it has prepared. The decision as to whether there will be a competition, or the new Board will simply be appointed, lies with the Supervisory Board. We believe this is good news, as any changes in the Board at this stage of the 10+ project could only result in unnecessary turmoil in the market. 2 April

31 Analyst: Kamil Kliszcz Last Recommendation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 13.7% 12.7% 17.1% 21.4% EV (current price) EBIT % % % Free float 15.3% Net profit % % % P/E Price change: 1 month -6.2% P/CE Price change: 6 month 2.2% P/BV Price change: 12 month -32.5% EV/EBITDA Max (52 w eek) 5.0 Dyield (%) Min (52 w eek) PGNiG PGNiG (Hold) Current price: PLN 3.3 Target price: PLN As predicted, PGNiG s stock broke its uptrend in March, and underperformed the 20 index for the first time in several months. The reason behind this weakness was speculation surrounding the reductions in gas tariff prices requested by the energy regulator. It is hard to predict how the negotiations between the gas monopoly and the regulator will end in a volatile macroeconomic environment (marked by USD/PLN exchange-rate fluctuations), but we feel that the company will not be happy with the outcomes. According to our estimates, the upside potential in absolute terms for PGNiG shares is very limited, and the company s huge capex planned for this year will significantly add to its net debt, affecting its reputation as a defensive and dividendpaying stock. We are reiterating a hold rating on PGNiG. CEO speaks about Q109 earnings In a radio interview, CEO Michał Szubski said that he doubted PGNiG s consolidated earnings in Q109 will be better than in Q408. We believe only one-offs could lead to a q/q decline in earnings. To be sure, in Q109 imported gas was not cheaper due to a weaker zloty, but PGNiG bought much less of it due to problems with supplies from the east, and made additional profits by selling stockpiled gas. In the first three months of the year, thanks to a seasonal spike in retail demand, Distribution should also improve its earnings. Problems of Ukrainian subsidiary PGNiG s Ukrainian subsidiary Dewon (36.8%) may lose access to the Sakhalinskoe exploration license (estimated capacity: 10bn cubic meters of gas). Until recently, Dewon used the license under an agreement with government-owned company NAK Nadra Ukrainiy which, however, lost the license on January 10 to another company. The issue is being looked into by Ukrainian security forces. Dewon's share capital is the equivalent of PLN 5m, and there were plans to increase it by PLN 56m. PGNiG s Management, however, decided to withhold the capital injection until the problems with the license have been clarified. Little is known about the previous activities of Dewon. Under original plans, gas extracted in the Ukraine was supposed to be sent to Poland through a pipeline. Nothing has come out of this so far. Tariff negotiations March witnessed a flurry of unofficial reports about PGNiG s tariff negotiations with energy regulator the URE. The company is reportedly required to set a lower, 12-month tariff regime. The URE has changed its demands from a several-percent to a nearly 15% price cut, while agreeing to an increase in distribution costs. Prolonged negotiations mean that the new tariff regime will not enter into force before May, and the delay is beneficial for PGNiG. As for the price cuts, we believe that if the current USD/PLN exchange rate persists at 3.4 until the end of the year, a 5% reduction in gas prices would allow PGNiG to break even on gas imports in H209. This would boost the EBIT of the Trade & Storage segment by as much as PLN 600m vs. our baseline scenario. To this we should add the potential additional earnings by the distribution subsidiaries. In turn, a reduction in prices by over 10% at the current exchange-rate level would match our assumptions (which predict a cut by over 20%, offset by a lower USD/PLN exchange rate). It will be hard for the gas utility and the regulator to find a compromise in a volatile market, given that their talks are based on the baffling conviction that tariff prices must be set for 12- month periods. Meanwhile, the USD/PLN exchange rate can change by 9 percent (PLN 0.30) in a matter of one week, making it virtually impossible to establish reasonable prices of natural gas without hurting the Polish chemical industry. CEO interview In an interview for Parkiet, President and CFO Sławomir Hinc confirmed that PGNiG plans to spend PLN 5 billion on investment this year. The capex will be 60-70% funded with the 2 April

32 company s own resources, and the rest will be secured through loans and EU financing (EU funding for new storages can reach 30-40%). PGNiG uses a EUR 600m credit line which expires in June 2010, and which will need to be refinanced for a higher amount, possibly necessitating a bond offering. Mr. Hinc said further that he did not expect an improvement in earnings before Q209, depending on tariff decisions by the URE. Negotiations with the regulator are tough, but one success has been a singling out of a storage price tariff which will probably enter into force in July PGNiG is not likely to see a profit in Q109, in particular not from sales of gas. In our last research update on PGNiG, we predicted an increase in net debt driven by investment in spite of a considerable y/y improvement in EBITDA. A separate price tariff for gas storage will indeed help streamline the tariff policy, and make the rules of setting wholesale prices more transparent. As for first-quarter results, Mr. Hinc did not say that he expected a consolidated loss, and we expect to see a profit thanks to a seasonal rise in the EBIT generated by the Distribution segment. PGNiG increases interests in Danish deposit PGNiG paid PLN 4m to Odin Energi for a 40% stake in a Danish prospecting license covering a field with an estimated capacity of 4.8 billion cubic meters of natural gas and 3.1 million tons of crude oil. As a result, the company now owns an 80% interest in the license. Drilling in the deposit is set to start in April

33 Analyst: Kamil Kliszcz Last Recommendation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 7.9% 4.1% 8.4% 6.8% EV (current price) EBIT % % % Free float 67.3% Net profit % P/E Price change: 1 month 13.8% P/CE Price change: 6 month -27.9% P/BV Price change: 12 month -40.0% EV/EBITDA Max (52 w eek) 43.4 Dyield (%) Min (52 w eek) PKN Orlen PKN Orlen (Buy) Current price: PLN 24.5 Target price: PLN 40.2 PKN Orlen shares rebounded in March after a few weak months, outperforming the 20 index, but the company is still surrounded by uncertainty pertaining to breached loan covenants. That is why its valuation does not fully factor in the favorable macroeconomic environment and the upcoming changes in strategic-reserve laws. We hold the company s Management by its promise to settle its issues with the lenders by mid-april, and thus provide a catalyst for a further uptrend in the stock value. The firstquarter earnings outlook is weak due to a negative LIFO effect (ca. PLN -160m) and huge (between PLN 1bn and PLN 1.2bn) losses on mark-to-market euro debt adjustments, but any resulting concerns, especially among foreign investors, should be alleviated by a successful resolution of the covenant issues. We are reiterating a buy rating on PKN. Government drafts revolutionary new legislation on strategic reserves According to reports, the Ministry of the Economy is working on amendments to the legislation governing strategic liquid-fuel reserves. The bill, which is said to shift the burden of having to stock emergency stockpiles from oil companies to a government agency, is expected to be ready by June. It provides that the agency would buy existing reserves from the oil companies, using a loan from an international financial institution, in exchange for regular maintenance fees, as is the practice in Germany and Hungary. There is no doubt that such a change is good for both PKN Orlen and Lotos. It would reduce the influence of LIFO effects on EBIT amid volatile oil prices (the effects also take a toll on the non-moving strategic reserves), as well as unfreeze huge amounts of cash currently frozen in working capital (for Lotos, this would mean that it would not have to increase its working capital in 2011, after expected strong sales in 2010 which would necessitate higher allocations toward mandatory reserves). Recall that PKN and Lotos are required to maintain fuel reserves equal to 76 days of sales, partly in crude oil (ca. 65%), and partly in finished products (35%). The value of PKN s reserves is estimated at PLN billion, and Lotos s stockpiles are worth about PLN billion (the stockpiles as percentage of sales are relatively larger in case of Lotos due to high imports). The present timing would be good for the government to buy the reserves, whose value is low in line with oil prices. On the other hand, a major portion of these reserves (over 60%) was built up until 2006, at prices which, on average, were similar to the current prices. One could say that the remaining portion generated losses after oil prices fell, but this is already factored in the stock values of both oil giants. All we can do is wait and see whether the government takes concrete measures. So far, the Ministry has accelerated the legislative work to catch up with an upcoming EU directive which will require all member states to comply. Ministry confirms plans to take over emergency reserve maintenance Deputy Treasury Minister Krzysztof Żuk confirmed that the Ministry was working on regulations to take over maintenance of emergency fuel reserves from oil companies. The Ministry expects to make a breakthrough on this matter this year. Fitch rating downgrade Fitch lowered Orlen's long-term issuer default rating from BB-/negative outlook to BB+, and the short term IDR from F3 to B. The ratings were downgraded due to an increase in net debt seen in Q408, and the capex plans seen in the context of deteriorating market conditions. Ratings remain on watch due to the fact that the company breached loan covenants and some of the loans might be called in. This is not a surprise, but a natural consequence of the way rating agencies work. The Q408 decrease in PKN s earnings and the increase in its net debt is by a non-cash phenomenon. As such, we believe it does not change the company's fundamental situation in any way. The rating downgrade may, however, have negative consequences, given that Orlen now has to renegotiate the loan agreements where covenants were breached. This will give the lenders another argument to hike margins. 2 April

34 Compromise with unions The Management of PKN Orlen has reached an agreement with trade unions. Salaries will remain unchanged in 2009 after the unions have dropped their demand for a 10% increase. It was agreed that employees will receive traditional one-time bonuses: PLN 500 for Easter, PLN 500 for Christmas, PLN 3000 for Chemist's Day, and PLN 1500 for the 10th anniversary of PKN. The total value of these bonuses is PLN 5500 per employee, i.e. less than in 2008 (PLN 6700). Treasury quashes Orlen / Lotos merger rumors Deputy Treasury Minister Krzysztof Żuk denied that the Treasury was back to planning a merger of the two oil giants. It is very unlikely that such an operation will take place in the near future. Nafta Polska is standing by its position that Lotos can look for a strategic investor after completion of the 10+ upgrade program. Nafta Polska to transfer PKN shares to the Treasury by the end of 2009 According to Deputy Treasury Minister Mr. Krzysztof Żuk, Nafta Polska (a company dedicated to the privatization of the Polish chemical sector, fully controlled by the Treasury) will be dissolved by mid By the end of 2009, it will transfer to the Ministry its holdings in PKN Orlen (17.3%) and Lotos (51.9%). Fuel sales in Lithuania are falling According to a representative of the Mazeikiu Nafta refinery and the Lithuanian Ministry of Finance, fuel sales dropped 24% in February. This was an effect of an increase in the excise tax, as well as the depreciation of the Polish zloty vs. the Lithuanian lit, which is pegged to the euro. As a result, retail prices of fuel in Lithuania are ca. PLN 0.46 higher than in Poland. Mazeikiu Nafta has a small share of the Lithuanian retail market (5%). The refinery gets ca % of its revenues from local wholesale sales. We do not think, therefore, that a decrease in volumes there constitutes a significant threat to Orlen's profitability. PKN reaches agreement with Lithuanian government PKN Orlen and the government of Lithuania agreed on the terms on which the latter will exercise its option to sell a 10% stake in Mazeikiu Nafta. Namely, PKN is required to pay 20% of the consideration (US $57m) immediately to an escrow account, and effect the outstanding consideration plus interest calculated based on 6M LIBOR, accruing as of March 20th, by April 30th. The total price of the stake is US $284.5m. Layoffs at Mazeikiu Nafta According to local papers, Mazeikiu Nafta is going to terminate 250 maintenance staff, who will then form their own company and provide services to the oil producer as external vendor. We expect layoffs across the PKN Orlen Group this year. The resulting savings will not become noticeable until 2010, and will be preceded by severance-pay charges this year. Employment restructuring The Management is planning to restructure employment at the company, by introducing unified hiring and employee assessment criteria. As a result, may employees face demotion. On April 1st, employees are set to receive notices changing their grades but not the scope of their duties. These changes will not entail salary cuts, but they could bring savings in the future because the company will not be bound by its agreements with the unions pertaining to salary increases. According to newspapers, savings could reach PLN 180m, but the unions might sue. It is hard to comment on these estimates for the time being. 2 April

35 Analyst: Kamil Kliszcz Last Recomm endation: Revenues % % % Number of shares (m) 75.0 EBITDA % MC (current price) EBITDA margin 12.9% 9.5% -0.4% 5.9% EV (current price) EBIT % Free float 26.2% Net profit % P/E Price change: 1 month 24.8% P/CE Price change: 6 month -63.4% P/BV Price change: 12 month -69.5% EV/EBITDA Max (52 w eek) 25.3 Dyield (%) Min (52 w eek) Police Police (Hold) Current price: PLN 5.7 Target price: PLN ZCh Police's stock continued on an upward trend in March, but outperformed the index by less than 1%. We cannot see any developments in the company s near future, either in terms of earnings, or the macro environment, that could sustain this value gain; rather, 2009 is looking to be a year of restructuring for ZCh Police, prompting us to stand by a hold rating. First-quarter results could disappoint due to inventory revaluations. Part of public offering proceeds will increase working capital Police announced that a part of the proceeds from the public offering (PLN 37.5m), originally earmarked for investment, would be temporarily used to increase working capital. The company is also in negotiations with banks concerning working capital financing secured by assets. They should be finalized soon. As a reminder, at the end of 2008, the company had ca. PLN 177m past-due payables to suppliers, while its cash was tied up by huge inventory levels (PLN 600m). Despite the declarations that capacity utilization in fertilizer production will be increased to 80%, we believe the company s H109 earnings will be under pressure from low prices; most likely, some of the stockpiled products will be sold below cost. Voluntary exit program ZCH Police launched a voluntary exit program for its employees toward the end of March, offering severance packages consisting of two to seven monthly salaries (the average salary at the company is PLN 4.3 thousand), depending on years of service. The Management expects up to 10% employees to make a voluntary exit (the parent company employs approximately 3.2 thousand staff, and the ZCh Police group as a whole has 3.6 thousand employees). The program is one of ZCh Police's restructuring measures. It is expected to cost the company PLN 7-8m this year, and generate annual savings of PLN 16-17m in subsequent years. 2 April

36 ZA Puławy ZA Puławy (Hold) Current price: PLN 70 Target price: PLN 65.5 Analyst: Kamil Kliszcz Last Recomm endation: Revenues % % % Number of shares (m) 19.1 EBITDA % % % MC (current price) EBITDA margin 17.3% 15.7% 8.2% 7.0% EV (current price) EBIT % % % Free float 29.2% Net profit % % % P/E Price change: 1 month 44.6% P/CE Price change: 6 month -8.5% P/BV Price change: 12 month -42.9% EV/EBITDA Max (52 w eek) Dyield (%) Min (52 w eek) 38.1 ZAP s share price has surged over 40%, and overshot our price target, since the date we rated the stock as accumulate, prompting a downgrade to hold. Catalysts for further growth will be few and far between in coming months in our opinion; demand seems to have stabilized after a buoyant rise at the beginning of the year, and the improvement in profitability brought about by upcoming cuts in natural-gas prices is already factored in our 2009/10 forecasts, which assume that the positive effects of these cuts will be offset by an increase in the gas distribution prices charged by Gaz-System. Summing up, ZAP is far from being a bargain at the current price level, which seems a good level for shortterm traders to take profit. ZAP to end Q308/09 in the black CFO Wojciech Szmyła announced that ZAP would probably post a profit for the third fiscal quarter in spite of hedging losses, although the bottom-line figure will not compare with the PLN 157m posted in Q108/09. Our Q308/09 profit estimate approximates zero. ZAP interested in Bogdanka privatization The CEO of ZAP, Mr. Paweł Jarczewski, said that the company was closely watching the privatization process at the Bogdanka mine; given their coal gasification joint ventures, future equity links are possible. ZAP had never said anything to this effect before. It is hard to assess the acquisition without knowing any details, but it does appear that it would create an additional obstacle to the coal gasification project as far as financing is concerned (Bogdanka was supposed to be involved). Caprolactam capacity utilization up to 100% The Management announced that thanks to two big contracts for caprolactam supplies to the Asian market, totaling USD 20m, the Company will increase its capacity utilization for this product to 100%. Capacity utilization has been going up gradually since the 50% level observed in late November and early December. The press release announcing full capacity utilization is excellent news, confirming the Company s strength in sales. For the time being, the sales are unlikely to be very profitable, but probably high enough to fully cover fixed costs. Board reshuffle speculation According to press speculation, ZAP is looking for a replacement for CEO Jarczewski who is reportedly going to get the blame for forex option losses. This does not seem fair to us. ZA Puławy now has one of the most conservative hedging policies among listed chemical companies (short-term cash flow hedges; the last of current contracts expire in September). This is not the first time that there is speculation about board reshuffling. If it proves true, investors will not be happy. 2 April

37 Telecommunications Netia (Buy) Current price: PLN 3.1 Target price: PLN 3.8 Analyst: Michał Marczak Last Recommendation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 20.4% 15.2% 15.6% 17.7% EV (current price) EBIT % % 36.6 Free float 100.0% Net profit P/E Price change: 1 month 1.0% P/CE Price change: 6 month 16.7% P/BV Price change: 12 month -17.9% EV/EBITDA Max (52 w eek) 3.8 Dyield (%) Min (52 w eek) Netia Novator s exit and 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 a national scale) capitalize on the liberalization of the fixed-line market (61.5% share of BSA, 71.5% of WLR), which owns a fiber-optic infrastructure that is attractive for potential industry investors, and which is able to consolidate the market. The company is expected to improve earnings in coming quarters. We are reiterating a positive rating on Netia. Rating withdrawn Standard and Poor's reiterated long term corporate rating of B with stable outlook. At the same time, the agency discontinued issuing ratings for Netia at the company's own request. Currently, Netia does not have debt to which ratings apply, hence the decision to cancel ratings, which are not free. In February, Netia announced that as of the end of 2008 it had net cash of PLN 192.5m and open credit lines of PLN 375.0m. Netia not paying TPSA for Tele2 A court in Warsaw put a stay on the payment of PLN 3.3m damages to TPSA, which had previously been awarded from Tele2 (now merged with Netia), and reinstituted the deadline for filing an appeal. TPSA is demanding that the alnets reimburse it for the gains they generated by following the regulator's decisions which were subsequently waived. In this case, TPSA charged Tele2 PLN 70m for interoperator payments calculated based on flat rates. This is good news for Netia. We have signaled before that if Netia loses in court, the seller of Tele2 is obliged to reimburse it for any damages. 2 April

38 Analyst: Michał Marczak Last Recommendation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 42.3% 42.0% 40.9% 39.9% EV (current price) EBIT % % % Free float 46.0% Net profit % % % P/E Price change: 1 month 7.4% P/CE Price change: 6 month -15.8% P/BV Price change: 12 month -12.4% EV/EBITDA Max (52 w eek) 24.4 Dyield (%) Min (52 w eek) TPSA TP SA (Hold) Current price: PLN 19.2 Target price: PLN 20.5 Because TPSA shares are trading close to our target (PLN 20.50), we are reiterating a neutral rating on the company. In the next two quarters, we expect the operator to set aside higher bad-debt reserves (PLN m higher on an annual basis), like it did during the previous crisis. The churn rate in fixed-line services is expected to accelerate going forward. We maintain that there will be no functional separation of TPSA in the manner proposed by the UKE. A final decision can be expected in the autumn. TPSA drops MVNO TPSA, owner of the wp.pl portal, decided to shut down the WPmobi MVNO which had 2.5 thousand active users during its best period, but whose user base has since dropped below a thousand. Last week, there was talk that Penta Investments was thinking about either selling or shutting down its own virtual operator, Mobilking. At December 2008, Polish MVNOs combined had only 95,000 users (0.22% of the total mobile user base), and these numbers started to decline even further after P4 launched its aggressive price-cutting campaign. Aside from Mobilking, major Polish MVNOs include those owned by mbank and Carrefour. The only role of TPSA s virtual operator was to ensure that it is able to compete in case the whole MVNO enterprise proved successful. Clearly, this has not happened, and maintaining WPmobi does not make much sense anymore. Good news from TPSA, without impact on its stock performance. PLN 1.5 per-share dividend payout TPSA s Management Board is recommending distribution of PLN 1.50 per share as dividends to shareholders. This is in line with earlier announcements. TPSA is also expected to conduct a share buyback for at least PLN 500m. TPSA responds to functional split plans TPSA drafted an Equivalence Charter as an alternative to the functional separation advocated by telecom regulator the UKE. The operator claims that its proposal will allow alternative telecoms to verify whether they are being serviced on the same terms as TPSA s retail subsidiaries. The solutions offered by the incumbent can be implemented quickly and at a much lower cost than the UKE s legally and financially disputable separation plan. TPSA estimates that its plan would entail costs between PLN 110m and PLN 300m over two years, that is 80% less than it would cost to carry out the retail/wholesale split proposed by the regulator. The Equivalence Charter comprises 700 pages, of which 500 are confidential. Instead of a functional separation, the incumbent is proposing establishment of Chinese walls, adjustments in employee incentive schemes, training in non-discrimination, oversight to ensure fulfillment of obligations (in the form of a number of indicators measuring the fair treatment of alternative operators), and establishment of a Telecommunications Forum to resolve issues concerning interoperator dealings. TPSA s proposals do not include a total separation of IT systems, or a rebranding of the wholesale business. The UKE is set to consult with other operators in April, and meet with all players during trilateral meetings in May and June. TPSA is optimistic that the regulator will get behind its proposals, which were developed during consultations within joint teams appointed by both parties. Rating outlook upgrade S&P Rating Services upgraded the rating outlook for TPSA to positive from stable. The longterm credit rating was reaffirmed at BBB+. The outlook upgrade is a result of the operator s conservative financial policy, its resilient operating profits, and good prospects for the future in spite of a cooling economy. Despite economic challenges and regulatory and competitive pressure, TPSA is able to successfully leverage its established position in the Polish market. 2 April

39 Media Agora (Buy) Current price: PLN 13.9 Target price: PLN 35.6 Analyst: Michał Marczak Last Recommendation: Revenues % % % Number of shares (m) 55.0 EBITDA % % % MC (current price) EBITDA margin 17.2% 12.2% 12.5% 14.7% EV (current price) EBIT % % % Free float 37.0% Net profit % % % P/E Price change: 1 month 20.1% P/CE Price change: 6 month -49.2% P/BV Price change: 12 month -67.6% EV/EBITDA Max (52 w eek) 42.9 Dyield (%) Min (52 w eek) Agora is poised for a series of weak earnings seasons as advertising expenses are set to decrease across all media, but most painfully at newspapers (a y/y drop by up to 15%). We believe that the earnings deterioration is already priced in. Gazeta Wyborcza is handling the crisis much more smoothly than other nationwide papers of record, as evidenced by rival Rzeczpospolita. We are reiterating a positive rating on Agora Agora Axel Springer is not getting Rzeczpospolita Two media firms: PMPG and ZPR, submitted binding offers to buy shares of Przedsiębiorstwo Wydawnicze Rzeczpospolita (PWR). Apparently, Axel Springer and Czech Republic s Respekt Media decided not to bid. PWR owns a 49% stake in Presspublica, publisher of the daily newspapers Rzeczpospolita, Parkiet, and Życie Warszawy. ZPR s operations include radio stations (Radio Eska, Eska Rock, VOX FM), the publishing house Murator S.A. (Super Express, Murator), and a nearly 20% stake in the Polish gambling market (over 130 casinos and gaming halls, ca low-stakes gaming parlors). PMPG s enterprises include magazines (Film, Machina,?dlaczego, Machina Design, Machina Sport&Style), and Web portals (Sport24.pl, Pilka24.pl, Korba.pl, Ukaraj.pl, Bulvar.pl, Kulisy.pl). PMPG is reportedly offering the State Treasury less for the PWR stake than was estimated before the due diligence audit. From the vantage point of Agora, the best turn of events would be if Rzeczpospolita was bought by Axel Springer and merged with its Dziennik broadsheet. But Axel Springer did not make an offer, which might mean two things: either that the publisher had never intended to buy Rzeczpospolita, or that it found out that PWR is in trouble (the recent elimination of 200 out of 700 jobs speaks to this theory). In our opinion, PMPG and ZPR are too weak and small to compete with Agora and Axel Springer in running newspapers of record amid a downturn in advertising. Layoffs at Rzeczpospolita According to unofficial sources, Presspublika is planning to eliminate over 200 jobs, including ca. 100 staff at the daily papers Rzeczpospolita, Parkiet, and Życie Warszawy. The publisher, who currently employs 700 people on the whole, is looking to save about 15 million zlotys per year. The situation at Presspublika is best illustrated by the fact that the publisher has just recently decided to hire a chief financial officer! 2 April

40 Analyst: Piotr Grzybow ski Last Recomm endation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 20.8% 30.6% 34.3% 36.3% EV (current price) EBIT % % % Free float 27.9% Net profit % % % P/E Price change: 1 month -6.3% P/CE Price change: 6 month -5.0% P/BV Price change: 12 month EV/EBITDA Max (52 w eek) 15.5 Dyield (%) Min (52 w eek) Cyfrowy Polsat Cyfrowy Polsat (Buy) Current price: PLN 13.7 Target price: PLN 15.9 The volatility of Cyfrowy Polsat s (CP) stock price seen after the announcement of the Sferis acquisition disappeared soon after the acquisition was called off. Still, CP shares underperformed in March, losing 3.7% in value against a general market rally, which was in line with our expectations and resulted from the defensive nature of the stock. In April, CP s value will be supported by fast-paced expansion of the subscriber base achieved in spite of an economic slowdown. On the other hand, as its hedge contracts expire, the company faces increased exposure to forex risks which could affect its first-quarter earnings as the dollar and the euro continue to trade high. We retain a positive long-term outlook on CP, but recommend underweighting the stock over the course of the next month. CP owns Sferia (for two days) Cyfrowy Polsat (CP) announced a takeover of an 11% stake in telecom operator Sferia. CP wanted to add broadband Internet services to its DTH and MVNO mix through Sferia s telecom infrastructure. The choice of Sferia was based on its 850MHz band license, leading-edge radio technology, an investment in progress which could have been refocused to match CP s needs, the possibility of launching broadband in selected areas still in 2009, and capacity for further expansion of services. At December 2008, CP had 2.72 million subscribers. After two days, CP backed out of the acquisition under pressure from investors. The acquisition of Sferia would have been a good step from a strategic standpoint, as it would have placed CP hand in hand with rival DTH/telecom teams of n and Netia, and Cyfra+ and TPSA. But the price of the noncontrolling stake deprived the investment of any added value for shareholders. Set-top box sales in Q109 According to CEO Dominik Libicki, sales of set-top boxes in the first quarter were higher than in the same period a year ago. In the first quarter of 2008, CP acquired thousand new subscribers. The numbers cited by the CEO are gross connections which should be reduced by expected churn multiplied by total subscribers. Last year s churn rate amounted to 7.5% on a full-year basis, and 1.8% in Q108. Assuming a flat year-on-year churn rate (7.5%), and taking into account the expanded subscriber base (2.19m in Q108, 2.73m in Q408), we can make a prediction that net subscriber additions this year will be slightly fewer than last year, but any growth will be a success for CP. BBB rating for Cyfrowy Polsat EuroRating awarded Cyfrowy Polsat a BBB rating with a stable outlook. The rating was issued after the company entered the 20 index on the WSE. A BBB rating is more or less close to the 20 median and it reflects the company's good liquidity. 2 April

41 Analyst: Piotr Grzybow ski Last Recomm endation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 35.5% 37.5% 32.5% 31.7% EV (current price) EBIT % % % Free float 40.9% Net profit % % % P/E Price change: 1 month -16.7% P/CE Price change: 6 month -53.3% P/BV Price change: 12 month -64.6% EV/EBITDA Max (52 w eek) 23.6 Dyield (%) Min (52 w eek) TVN TVN (Buy) Current price: PLN 8.4 Target price: PLN The purchase of a higher stake in the n platform took a toll on TVN s stock value, which declined 6% while the broad index gained 10.8%. In our opinion, the acquisition, although unfavorable from the point of view of minority shareholders, does not justify the scale of the depreciation seen in the company s share value since its announcement. The flat growth in revenues expected throughout this year is also priced in, and, because we believe that TVN will gradually make up for the value gap relative to the index, we recommend overweighting its shares. Viewership in February TVN's total 24h audience share was 20.5% in February vs. 21.5% a year earlier, and 22.7% in peak time (6pm - 11 pm), vs. 24.0% a year ago. The February ratings of the TVN channel were 15.3% (24h, -1.1pts) and 18.4% (peak time, -1.5pts). TVN group s share of the target demographic (16-49 years old) fell by 0.9pts y/y to 21.2% (24h). In peak time, the decrease was 1.5pts, to 22.9%. For the TVN channel, the share of the target demographic was 16.3% (24h, - 0.6pts y/y) and 18.9% (peak time, -1.2pts y/y). The news channel TVN 24 had a 5.1% share of its target demographic (people living in cities above 100,000 people, at least 25 years old, with above-average incomes), vs. 4.8% a year earlier. For peak time, these numbers were 4.1% and 3.6%, respectively. The weaker ratings are to a certain extent an effect of the company s strategy of adjusting its programming to the trends in the advertising market. We are reiterating a positive rating on TVN. The Management should present a cost-cutting plan, which should please investors. Rate-card revenues in February TVN s ad revenues valued based on rate-card prices fell 4.7% y/y in February to PLN m. The month s leader in ad sales was Polsat with PLN m, marking a 12.3% decrease compared to February Public channels increased revenues, with TVP1 recording a 16.9% y/y surge to PLN m, and TVP2 enjoying a 23.8% boost to PLN 79.15m. Since these figures do not take into account discounts, they cannot be considered reliable forecasting data, especially in a period when discounts and rebates play a bigger role than before. TVN takes majority stake in n TVN purchased a 26% stake in ITI Neovision, operator of the DTH platform n, increasing its interest to 51%. The 25% equity interest and a 26% stake in n s receivables cost EUR 46.2m. TVN further undertook to inject n with EUR 25.1m. The purchase price could be raised in 2011 if n achieves the following targets in 2010: 1) a positive EBITDA, 2) subscriber base over 848,000, 3) ARPU over PLN 60.48, 4) subscription income over PLN 555m. If these conditions are met, TVN will pay EUR for each zloty of extra subscriber income. Last May, TVN paid EUR 95m for a 25% stake in n s EV. Since both TVN and n report earnings in zlotys, we will analyze the transaction in that currency. In May 2008, the EUR/PLN exchange rate averaged 3.40, which makes PLN 323m for the 25% stake, and suggests that n s equity was worth approximately PLN billion. At the moment, one euro is worth PLN 4.63, implying a value of PLN 214m of a 25% stake, and PLN 823m of the entire n. There is no doubt that the latest deal was done at much more attractive terms, especially since a control premium is probably involved. That said, the price parameters as calculated on 2008 multiples are still relatively high. ITI has not released Q408 earnings yet, so we do not know the details of n s performance in Based on TVN s estimations of how consolidation of n would have influenced its 2008 results, and taking into account TVN s and ITI Neovision s intercompany sales of PLN 48m, we can assess that n s revenue last year amounted to PLN 250m. This figures to an EV/S ratio of 3.3 compared to 2.9 for Polsat (after a 8.4% value drop caused by news about acquisition of Sferia). n carries a 12.8% premium to Cyfrowy Polsat even though one would expect a discount in a company which has yet to break even. Timing is important 2 April

42 here 2008 was the first year of rapid subscriber addition for the platform which will boost revenues in We estimate that n can generate sales of at least PLN 400m this year, suggesting an EV/S ratio of 2.05 and a 15.4% discount to rival Cyfrowy Polsat, which still does not fully factor in n s lack of profits which we do not expect to see yet in In 2010, on a forecasted EBITDA of ca. PLN 80m, and multiples similar to Cyfrowy Polsat s before it announced the Sferia acquisition (7.7), n will be worth some PLN 558m. In 2011, EBITDA could reach PLN 120m, and EV/EBITDA will hover around 7.0, implying an equity value of PLN 837m, a bit higher than the value implied by the transaction. Summing up, in spite of ITI and TVN s best efforts to quell investor concerns over the viability of the deal, the price paid for n seems to us higher than the market price. But the premium is not big this time, and should not fundamentally affect TVN s stock. 1.5m subscribers for n in 2012 The n platform wants to have 1.477m subscribers in 2012, with ARPU at PLN 86.5 vs. PLN 50 in At the EBITDA level, the break even point is expected in At the end of 2009, n will have 766,000 subscribers vs. 500,000 at year-end In 2010, the number of subscribers is supposed to increase to 1.017m. TVN estimates that in 2012 the Polish DTH television market will have 7.5m subscribers vs. 4.7m at the end of The execution of the share buyback plan, for which TVN earmarked PLN 500m, hinges on the Company's earnings in the individual quarters; the purchase of shares in the n platform will have no impact on dividend payments. TVN is currently at stage two of its share buyback program (PLN 50m). Debt on watch Standard&Poor's placed TVN s long-term "BB" credit rating, and the BB- rating on TVN s EUR 215m-worth of notes issued by TVN Finance PLC, on ratings watch negative. The move follows an announcement by TVN that it wants to increase its stake in the digital television platform n to 51% from 25%. Polsat believes TV advertising will not shrink in 2009 Polsat expects the TV advertising market to become more stable in The company has reiterated its plan to open three new themed channels this year, including one for kids and one film channel. At present, the network operates the following themed channels: Polsat News, Polsat Cafe, Polsat Play, Polsat Sport, Polsat Sport HD and Polsat Sport Extra. Recently, the market has been discounting a slight decline in TV advertising as well. If Polsat s assumptions are confirmed, it will be a nice surprise. 2 April

43 WSiP (Buy) Current price: PLN 13.2 Target price: PLN 18.9 Analyst: Piotr Grzybow ski Last Recomm endation: Revenues % % % Number of shares (m) 24.8 EBITDA % % % MC (current price) EBITDA margin 15.4% 27.5% 24.4% 24.4% EV (current price) EBIT % % % Free float 36.6% Net profit % % % P/E Price change: 1 month 1.3% P/CE Price change: 6 month -12.3% P/BV Price change: 12 month -12.3% EV/EBITDA Max (52 w eek) 16.6 Dyield (%) Min (52 w eek) 11.5 As expected, WSiP shares underperformed the index in a rallying stock market, and gained just 2.3% in value. April should see similarly weak performance given the lack of new potential value drivers. We were surprised by the big, PLN 44m allocation toward a share buyback, but the fact that the buyback is set for October should be properly discounted by investors. We recommend underweighting WSiP in the coming month WSiP PLN 44m buyback? WSiP shareholders decided to allocate PLN 44m toward a share buyback to be conducted through a tender offer scheduled for October 30th, 2009 at the latest.the scale of the payout exceeds our expectations. Good news for investors. 2 April

44 IT Sector Asseco Slovakia Asseco Poland EUR 10m dividend payout Shareholders decided to pay out PLN 0.47 per share in dividends (EUR 10.04m out of EUR 11.5m net income). Date of record is March 19, with payment set for May 4th. PLN 70m dividends Assceo s CEO Mr. Góral says that his company is going to distribute PLN 70m out of 2008 earnings as dividends to shareholders. The CEO also hopes that 2009 will be as successful as 2008 in terms of earnings in spite of tough economic conditions, thanks to a strong contract backlog which amounts to PLN 1653m, and includes PLN 1.386m-worth of orders for proprietary software and services. Mr. Góral is observing a slowdown in the Integration business, and an acceleration in the Software business. Mr. Góral's information on the dividend payout was a bit more specific than what was earlier referred to as more than 60 million zlotys. An important question is how Asseco will treat its treasury stock which, at the end of 2008, was represented by 9.3 million shares out of the 77.6 million total shares outstanding. It would be reasonable to exclude these shares from the payout in order to not create a tax burden. In such a case, the per-share dividend would be PLN 1.02, implying a dividend yield of 2.28%. We are impressed by Asseco s contract backlog which, this early into the year, is already equal to 60% of last year s revenue. It seems that Asseco might make it through the crisis unscathed. Acquisitions still on Asseco s CEO Mr. Góral told PAP that he has no intention of cutting back acquisitions because of the crisis, and that most deals are scheduled for finalization in the fourth quarter. Acquisition money will come from a large financial institution which is set to invest in ASEE. Asseco has targeted opportunities in Scandinavia, Spain, and Germany. Mr. Góral also commented on the credit situation, saying that in spite of an overwhelming pessimism, banks are still willing to finance corporations. We were most interested to learn about the large financial institution which is supposed to invest in ASEE, probably through the company s public offering. As for the M&A activity, we think that acquisitions made while an economic slowdown is keeping prices down can create added value for the company. Dividends from ABS and ABG According to CEO Mr. Góral, Asseco Poland is set to receive dividends in the amount of PLN 14m from Asseco Business Solutions, and PLN 25m from ABG. These receipts will be distributed to Asseco s shareholders who have been promised a payout totaling PLN 70m. Comarch Plans for 2009 Comarch is not planning to pay dividends out of 2008 profits. In the near future, the company wants to focus on acquisitions (small, niche targets). The takeover of a German company is currently being negotiated, and it could be concluded before the end of the month. Comarch is opening branches in Vietnam and China, which could push its cost of marketing up. This year, the company s revenues are set for 5% growth, while profitability should remain at 6-7%. The CEO is considering a share buyback effort. 2 April

45 Analyst: Piotr Grzybow ski Last Recomm endation: Revenues % % % Number of shares (m) 16.0 EBITDA % % % MC (current price) 75.8 EBITDA margin 1.3% 1.1% 1.1% 1.2% EV (current price) EBIT % % % Free float 51.3% Net profit % % % P/E Price change: 1 month 51.3% P/CE Price change: 6 month -56.4% P/BV Price change: 12 month -78.9% EV/EBITDA Max (52 w eek) 22.6 Dyield (%) Min (52 w eek) AB (Hold) Current price: PLN 4.8 Target price: PLN 12.8 ` After a rebound in March, we believe that, as sentiment on the stock market improves, AB s stock is poised to continue its climb on expectations of solid results for the first half of the business year. Accordingly, we recommend overweighting AB shares relative to the broad index in the coming month AB April

46 Analyst: Piotr Grzybow ski Last Recomm endation: Revenues % % % Number of shares (m) 17.2 EBITDA % % % MC (current price) EBITDA margin 2.1% 2.6% 2.8% 2.8% EV (current price) EBIT % % % Free float 40.9% Net profit % % % P/E Price change: 1 month 60.0% P/CE Price change: 6 month -63.6% P/BV Price change: 12 month -70.6% EV/EBITDA Max (52 w eek) 26.5 Dyield (%) Min (52 w eek) Action Action (Accumulate) Current price: PLN 7.2 Target price: PLN ` Action stock surged 62% in March on strong quarterly results which offset the loss generated in the preceding quarter, and thanks to improved sentiment. Since the strong earnings are already priced in, the company will probably give back some of the premium in April. We recommend underweighting Action in the coming month. Q2 2008/2009 results Action disclosed the earnings figures for the second fiscal quarter in its semi-annual financial report. Year-on-year sales decreased more than expected (from PLN 701.3m to PLN 657.0m compared to our estimate of PLN 659.2m), reflecting the general slowdown in the IT industry and a weaker-than-usual demand during the Christmas season. The zloty s sharp depreciation in the past few months led to losses on revaluations of payables, and left the company with cheap excess inventory which drove the gross margin up to 12.4%, and boosted the gross profit which was only slightly weighed down by higher SG&A expenses. Forex trends probably caused Action to post high negative exchange differences again, as evidenced by high other operating expenses. EBIT exceeded our estimate at PLN 26.6m (vs. PLN 16.3m), which we would attribute to the fact that we expected hedging gains to be recognized under finance expenses, while Action offset them against other operating expenses (however, this is just a guess). After all finance gains and losses and taxes, bottom-line income came in at PLN 21.2m vis-a-vis PLN 15.3m a year earlier and our estimated PLN 18.9m. What caught our attention when looking at Action s balance sheet was the huge drop in interest expenses to PLN 84.5m from PLN 144.5m in the preceding quarter, as a result of a reduction in working capital (shorter receivables periods). 2 April

47 Analyst: Piotr Grzybow ski (USD m) change 2009F change 2010F change Basic data (PLN m) Last Recomm endation: Revenues % % % Number of shares (m) 55.5 EBITDA % % % MC (current price) 66.0 EBITDA margin 2.0% 1.3% 0.6% 1.2% EV (current price) 73.5 EBIT % % % Free float 32.8% Net profit % P/E Price change: 1 month 101.7% P/CE Price change: 6 month -79.5% P/BV Price change: 12 month EV/EBITDA Max (52 w eek) 9.0 Dyield (%) Min (52 w eek) ASBIS ASBIS (Hold) Current price: PLN 1.2 Target price: PLN ` Improved sentiment gave a big push to Asbis shares, which soared 107%, partly offsetting the discount created by investors who had previously bet on its bankruptcy. We do not think that investors will be eager to cash out in April even though first-quarter earnings will be far from stellar. The current share price still includes a high discount to the liquidation value, but this discount will disappear together with the uncertainty surrounding the company's eastern markets. Hence, we recommend overweighting Asbis in the coming month. Management s comments on Q408 earnings Asbis s earnings deteriorated due to the financial crisis, primarily due to the depreciation of local currencies vs. the USD. It is possible that Q109 will end with a loss as well, although a lot depends on exchange rates in March. The CEO admits that uncertainty caused by the crisis has dramatically reduced demand, in some countries by as much as 50%. In November, the company launched a cost-cutting program, which foresees a reduction in G&A expenses, and improvements in operating efficiency and working-capital management. The program is expected to bring USD 1.4m in savings in H1 and USD 1.6m in the ensuing quarters, starting in Q209. Asbis also hopes to offset weaker sales in some countries (Ukraine, Russia) with higher sales in other regions (Middle East and Aftica). According to the CEO, the company s FY2009 revenues will be comparable to those seen in FY2006 and FY2007. Will cost cuts improve earnings? During the first two months of the year, Asbis signed five new distribution agreements, which are supposed to help diversify its product portfolio. The company is also implementing a costcutting program. By moving its distribution center from Amsterdam to Prague, it is supposed to generate USD 1.4bn savings in The Management also believes that the company's earnings should improve as the situation in the forex markets stabilizes and the share of dollar sales increases. Asbis wants to increase the share of its in-house brands Prestigio and Canyon from 5% in 2008 to 10% in 2-3 years. 2 April

48 Analyst: Piotr Grzybow ski Last Recomm endation: Revenues % % % Number of shares (m) 8.2 EBITDA % % % MC (current price) 61.9 EBITDA margin 2.3% 1.7% 1.2% 1.8% EV (current price) 84.1 EBIT % % % Free float 20.3% Net profit % % % P/E Price change: 1 month 88.8% P/CE Price change: 6 month -70.7% P/BV Price change: 12 month -79.0% EV/EBITDA Max (52 w eek) 38.7 Dyield (%) Min (52 w eek) Komputronik (Accumulate) Current price: PLN 7.6 Target price: PLN 33.9 ` Komputronik shares rallied 88% in March compared to a 10.8% gain for the broad market, yielding the second-highest return from among IT distributor stocks aside from Asbis. In our opinion, neither the quality of the company s fourth-quarter results, nor the firstquarter outlook, justify such as big a gain in value, and we expect at least partial profittaking in April. Consequently, we recommend underweighting Komputronik this month. 8 0 Komputronik April

49 Metals Kęty (Buy) Current price: PLN 61 Target price: PLN Analyst: Michał Marczak Last Recommendation: Revenues % % % Number of shares (m) 9.2 EBITDA % % % MC (current price) EBITDA margin 15.5% 16.1% 17.3% 15.9% EV (current price) EBIT % % % Free float 46.0% Net profit % % % P/E Price change: 1 month 2.7% P/CE Price change: 6 month -22.0% P/BV Price change: 12 month -49.1% EV/EBITDA Max (52 w eek) Dyield (%) Min (52 w eek) If the zloty does not strengthen further into the year, Kęty will be forced to revise its fullyear bottom-line forecast (PLN 60m). EBITDA could exceed expectations. Since Kęty has the weakest quarter of the year behind it, we are reiterating a positive rating on the company Kęty Preliminary first-quarter results Kęty s Management expects Q109 revenue to approximate PLN 240m-245m after a 17% decline from the same period a year ago caused by lower aluminum prices and weaker sales volumes generated by the Extruded Products Segment (EPS). The Flexible Packaging Segment (FPS) slightly exceeded last year s first-quarter sales, while the other segments saw decreases between 4% and 15%. The Q109 consolidated operating profit is estimated at PLN 24-26m, and bottom-line profit will fall in the range of PLN 2m and PLN 4m after being weighed down by a one-time charge resulting from foreign-currency revaluations which will approximate PLN 15m. Kęty expects to reduce its net debt by ca. 6% to ca. PLN 340m. First-quarter operating profit is likely to reach the same level as in the seasonally stronger Q408. As volumes decline, earnings are supported by EUR/USD exchange rates. Note also that the Kęty s amortization and depreciation expenses increased by PLN 3.5m compared to last year. Kęty prepared its Q109 estimates assuming the following exchange rate levels: PLN/EUR 4.49; PLN/USD The actual exchange rate levels are higher, meaning that the company might incur an additional financial loss of PLN 2.5-3m (26% euro loans Euro, 4% USD loans, 4% CHF loans). 2 April

50 Analyst: Michał Marczak Last Recommendation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 41.3% 36.1% 15.3% 12.6% EV (current price) EBIT % % % Free float 36.0% Net profit % % % P/E Price change: 1 month 25.5% P/CE Price change: 6 month -5.2% P/BV Price change: 12 month -54.5% EV/EBITDA Max (52 w eek) Dyield (%) Min (52 w eek) KGHM KGHM (Accumulate) Current price: PLN 46.5 Target price: PLN 49.2 KGHM shares reached our price target set in November Momentum is still strong in the market of industrial metals, which has been experiencing a seasonal increase in demand (demand should stay strong until June), which this year could be reinforced by inventory rebuilding by buyers who had reduced their finished-product stockpiles during the sales slowdown of late Q408/Q109. It is hard to predict at the moment how fast investors will be discounting an inflationary scenario forecasted for 2010, and the expected depreciation of the US dollar, both of which are potential drivers for copper prices. Because we see upside potential in our price target, we are reiterating a positive rating for KGHM in spite of the recent price rally. We are downgrading our rating from buy to accumulate. KGHM goes shopping KGHM is considering buying one of several available copper fields abroad. A short list of the potential targets, all located in either South or North America, will be ready by the end of the second quarter. Another, bigger acquisition is planned for Thanks to these purchases, the company might be able to boost its capacity from 488,000 tons to 700,000 tons per year.we reiterate our view that this is a good time for companies such as KGHM (i.e. with excess cash) to purchase deposits. Unions make threats, salaries frozen The two biggest trade unions operating at KGHM are considering launching a labor dispute. They object to the Management s decision to freeze salaries in For the first time in history, the Management decided to freeze salaries, which is of course a good move. Unsurprisingly, the unions do not see this the same way. KGHM s Management Board is going to resume salary negotiations with the trade unions after analyzing first-quarter results, that is around April 20th. We expected KGHM workers to forestall salary demands until the third quarter, but the macroeconomic environment is so favorable for the company that it might deliver its full-year net profit target (PLN 480m) after just one quarter. KGHM denies wanting to unload telecom operations KGHM denied that it wants to sell Telefonia Dialog this year, and reaffirmed its intention to divest the telecom within two-three years. We interpreted the rumored sale as a move on KGHM s part to gain a tax shield before this year s sale of Polkomtel stock. Apparently, this is not the case. 2 April

51 Construction Road Construction Other Infrastructure Construction growth in February Construction production was 1.9% higher than a year earlier in February, and 17.2% higher than in January. Seasonally adjusted growth rates were 2.3% y/y and 0.5% m/m. Economic cooling to hurt construction less than other industries Marek Michałowski, Head of the Polish Construction Employers Association (PZPB), thinks that the construction industry will not slow down as much as other industries. He rates net growth this year at zero, with housing and office developments suffering most, while infrastructure developers will continue to enjoy strong profits. Road budget PLN 8bn short due to sluggish legislation? Legislative work on a bill to approve a PLN 8bn loan from the European Investment Bank to fill a gap in the National Road Fund is in a deadlock. Poland s road budget for 2009 is PLN 29 billion, of which PLN 11bn is to be provided by the government, PLN 10bn are EU subsidies, and PLN 8bn was to be drawn from the Fund. CEO on planned contract-fee advances Polimex s CEO Mr. Jaskóła said in an interview that the entry into force of a recent proposal to allow road authority the GDDKiA to pay advances to contractors, would greatly accelerate the development of Poland's road infrastructure. CEO on the situation in infrastructure development According to the CEO of Budimex Mr. Michałowski, times are good for the infrastructure industry. EU funding is driving projects, skilled workforce is coming back from abroad, and there are plenty of machines available for purchase or lease. National road authority the GDDKiA spent PLN 16bn in 2008, and, even if it spends just PLN 24bn out of the PLN 28bn planned in 2009, this will mean an increase by 50%. This expenditure will be further supported by local government allocations. Building firms are using between 60% and 80% of capacity (Budimex is using 80%). New players are starting to emerge, but they are much weaker than the incumbents. Mr. Michałowski says that prices offered by companies bidding for infrastructure contracts are mostly shaped by expected trends in costs. Warsaw Metro award stalled A possible error was found in the best bid submitted by a consortium of Astaldi and Gulermak (PLN 4.1bn, 10% less than the next lowest bidder). The consortium named the project manager, the company Metro Warszawskie, instead of the project owner, the City of Warsaw, as the beneficiary of bank guarantees. This could be a consequence of misleading information given by city officials. Building Construction Energoinstal Construction industry on the situation in real estate Kongres Budownictwa an association of organizations operating in the construction industry, estimates that between 80% and 90% of all housing projects scheduled for this year were put on hold. Ambitious earnings targets Energoinstal s contract pipeline for 2009 is already full at PLN 250m. The CEO expects good first-quarter results. Since building of energy capacity in Western Europe has been trimmed, the company is waiting for contract opportunities from the Polish market. Energoinstal is currently negotiating a PLN 14m contract for boiler delivery to Germany, and is preparing to bid in a PLN 300m tender. The company expects an increase in this year s earnings by several dozen percent. Energoinstal is looking to acquire an automation company and a turbine maintenance company, both making profits and generating sales of ca. PLN 15m annually. The two acquisitions would drive 2009 revenue over the PLN 250m target. Energomontaż Południe Good outlook for coming years According to the CEO, Energomontaż Południe (EPd) is vying for contracts from abroad worth 2 April

52 Energomontaż Północ Hydrobudowa Polska Mostostal Export Mostostal Zabrze Naftobudowa several hundred million zlotys, and plans to fill its 2010 contract backlog with orders exceeding PLN 300m. The company is observing an increase in competition, and faces a shortage of welders for whom it had to look in Belarus and the Ukraine. In fact, between 10% and 15% of EPd's employees are foreign citizens. Energomontaż Południe has no plans to release an earnings guidance for 2009, but estimates that its Q net profit will be similar to the profit recorded last year (PLN 0.5m). PLN 355m already in 2009 backlog EPn, through its subsidiary Energomontaż Północ Gdynia, signed an agreement with Oilwell Varco for the construction of a service tower (PLN 9.1m, 2.8% of FY2008 revenues). In turn, Energop Sochaczek signed an agreement for the construction of support structures at the Flamanville nuclear power plant (PLN 7.7m, 2.4% of FY2009 revenue). As a result, the FY2009 backlog grew to PLN 355m. The Management says that all the contracts come with good margins. Hydrobudowa makes best bid on Baltic Arena Hydrobudowa Polska and partner Alpine Bau submitted the lowest bid on a contract to build the Baltic Arena stadium in Gdańsk (PLN 427.7m). The next lowest bidders were Budimex (PLN 471.2m), Baugesellschaft Walter Hellmich with Pol-Aqua (PLN 477m), Polimex Mostostal with J&P Avax (PLN 486.7m), Hochtief with Warbud (PLN 490.8m), PORR, Strabag, and Zeman Dachy Fasady (PLN 491.4m), and a Chinese consortium (PLN 520.5m). Mostostal Export suspends negotiations with potential investor Mostostal Export suspended negotiations with a potential investor due to the financial crisis. Further, Mostostal Export is not going to take over an environmental-engineering firm which did not meet all requirements. A1 motorway contract added to backlog Polimex Mostostal and Mostostal Zabrze are going to build a section of the A1 motorway connecting Sośnica with Maciejów. Of the total fee of PLN 900m, Polimex gets PLN 393m, and Mostostal Zabrze gets PLN 84.3m. Steel frames still in demand Mostostal Zabrze s CEO says that the situation in steel-frame sales is not bad, although he is concerned about the future. Mostostal Zabrze plans to offer its steel structures to the builders of five football stadiums in Krakow, Chorzów, Wrocław, Warsaw, and Gdańsk, and is looking forward to competing for two orders for biomass systems from the Dolna Odra and Bełchatów power plants. The share of exports in revenues is expected to drop to 50% in MZ s standalone contract portfolio is worth ca. PLN 440m (double the revenue amount projected for 2008). PLN 23.2m contract Naftobudowa won a PLN 23.3m contract from OLPP for construction of storage tanks in Koluszki. Pol-Aqua Projprzem Granite mining license Kampol, a Pol-Aqua subsidiary, received a 50-year license to mine granite from its own deposits (estimated at 25.7 tons). The deposit could be used for aggregate production at first. Projprzem expects flat y/y revenues Projprzem received an order for steel frames for EUR 4.7m (PLN 21m) with a deadline in December The steel-frame backlog is currently full at PLN 70m. In 2009, Projprzem expects to generate one-third of planned revenues from steel frames, one-third from warehouse loading systems, and the rest from sales of dwellings in Bydgoszcz and from construction services. The revenue contribution of industrial-construction services is expected 2 April

53 to drop sharply from the 50% recorded in Projprzem does not intend to release an official earnings guidance, but the CEO says that 2009 revenue should be at least as good as in Expanding production of loading platforms Projprzem has over PLN 40m in cash, which it plans to spend on acquisitions. The company wants to expand in manufacture of steel frames and loading platforms, and these plans are supported by low prices of steel and a strong euro. Thanks to capacity upgrades, profit margins are expected to increase. Remak Remak to pay dividends? Remak s Management Board is recommending distribution of PLN 2.55m (PLN 0.85 per share) as dividends to shareholders. 2 April

54 Analyst: Maciej Stokłosa Last Recommendation: Revenues % % % Number of shares (m) 25.5 EBITDA % % % MC (current price) EBITDA margin 1.7% 4.0% 5.7% 3.7% EV (current price) EBIT % % % Free float 26.7% Net profit % % % P/E Price change: 1 month 23.1% P/CE Price change: 6 month -3.7% P/BV Price change: 12 month -20.6% EV/EBITDA Max (52 w eek) 86.8 Dyield (%) Min (52 w eek) Budimex Budimex (Hold) Current price: PLN 66.4 Target price: PLN 69.1 In our April 2nd Research Update on Budimex, we lowered our price target on the company s shares to PLN 69.1, and downgraded or rating to hold, after an increase in the stock value discounting the future outlook. Budimex s net cash could decrease significantly in coming years due to a weakening standing of building subcontractors, and the need to spend PLN m on an acquisition of a 5% stake in Autostrada Południe (a move about which we have mixed feelings). As a consequence, the hefty dividends expected in 2009 will probably be a one-time event. Finally, certain risks are entailed in the contract for an A1 motorway section, as in 2011 and 2012 prices of building materials and subcontractor services will probably be higher than they are now (these prices might increase at a rate higher than the inflation rate which will be used to index the contract fees). Budimex to improve profits, pay dividends CEO Michałowski said that Budimex still wants to take over PRK Krakow to reinforce its position in railroad development. On a 2009 backlog of PLN 2.6bn, the company should achieve a profit at least equal to last year s. The total backlog is worth approximately PLN 7 billion (including the A1 motorway contract). The CEO would like too see profitability increase to 3.2% or even 3.3% this year. The Management Board will consult the Supervisory Board on 2008 earnings distribution (dividends could exceed PLN 100m). Mr. Michałowski believes that the real-estate business is going to generate profits in spite of the slump. Of a total of 2000 dwellings being built, 1000 have already been sold. Budimex to distribute 2008 profit Budimex is going to pay dividends out of its PLN 49.2m profit for Budimex Dromex gets back performance bonds A court in Warsaw awarded granted Budimex Dromex s claim for PLN 20.7m plus interest in performance bonds drawn upon in November Budimex goes to court Budimex is suing national road authority the GDDKiA for wrongful termination of a contract for a bypass road around Augustów. The company is claiming for damages in the amount of PLN 44m (the claim represents 10% of the total gross value of the contract). The GDDKiA quotes vital public interest as a valid cause for termination according to public procurement laws, and says that the company is not entitled to any damages. Budimex wins arbitration A court of arbitration awarded PLN 54m to the consortium of Ferrovial and Budimex (Budimex s stake is 40%) from airport operator PPPL. The award is equal to bank guarantees drawn by PPPL in 2007, plus interest and court fees. PPPL is going to appeal. The operator is claiming PLN 137m in lost profits resulting from delays in the completion of a terminal in the Okęcie airport, while Budimex and Ferrovial are claiming PLN 200m in compensation for completed work. PLN 141.5m contract Budimex signed a contract with Aclatel-Lucent to turn the Konin-Stryków stretch of the A2 motorway to a toll road. The contract has an effective term from October 2009 to October April

55 Analyst: Maciej Stokłosa Last Recommendation: Revenues % % % Number of shares (m) 4.7 EBITDA % % % MC (current price) EBITDA margin 7.3% 9.7% 8.5% 8.4% EV (current price) EBIT % % % Free float 39.1% Net profit % % % P/E Price change: 1 month -5.0% P/CE Price change: 6 month -39.0% P/BV Price change: 12 month -37.2% EV/EBITDA Max (52 w eek) Dyield (%) Min (52 w eek) Elektrobudowa Elektrobudowa (Buy) Current price: PLN 123 Target price: PLN We are reiterating a long-term buy rating on Elektrobudowa. Elektrobudowa s earnings estimates for 2009 are lower than ours. The company expects to generate a revenue of PLN 805.8m and a profit of PLN 48.1m, compared to our estimates of PLN 830.8m and PLN 56.2m respectively. Profits are set to drop largely because of a slowdown in the Russian market (which is expected to generate PLN 4m less than we predicted). Note that Elektrobudowa works on short deadlines, and the actual results might deviate from the guidance. Historically, Elektrobudowa has been known to exceed its earnings estimates, and this could be the case this year. We will revisit our earnings forecasts for the company after Q109 earnings announcement. The official guidance might not encourage to buy Elektrobudowa as a short-term investment, but an investor looking to invest for the long term should consider it. Elektrobudowa is not likely to show much revenue growth over the next two years, but is poised for a rebound in 2011 on upgrades planned by Polish power plants. FY2009 guidance Elektrobudowa released a 2009 earnings guidance which pegs consolidated sales at PLN 805.8m (vs. PLN 811m in 2008), and bottom-line income at PLN 48.1m (down from PLN 60.3m in 2008). On a standalone basis, sales are expected to reach PLN 752.7m (vs. PLN 786.2m in 2008), and net income is estimated at PLN 50.1m (vs. PLN 56.3m). The company explained that it made allowances for unpredictable events such as customer bankruptcies or project delays when forecasting this year s profitability. Elektrobudowa expects this year s other operating expenses to reach PLN 2.9m. The consolidated bottom-line estimate factors in a PLN 2.9m loss generated by subsidiary Wektor, and a PLN 1.6m drop in the earnings of subsidiary Kruelta. 2 April

56 Erbud Erbud (Buy) Current price: PLN 22.4 Target price: PLN 26.7 Analyst: Maciej Stokłosa Last Recomm endation: Revenues % % % Number of shares (m) 12.6 EBITDA % % % MC (current price) EBITDA margin 5.2% 6.7% 5.9% 3.8% EV (current price) EBIT % % % Free float 21.0% Net profit % % % P/E Price change: 1 month 1.4% P/CE Price change: 6 month -62.0% P/BV Price change: 12 month -75.1% EV/EBITDA Max (52 w eek) 90.0 Dyield (%) Min (52 w eek) 19.9 We are reiterating Erbud as a long-term buy. The company has recently acquired a major shopping-center contract for which financing is alraedy secured. Concerns about the availability of new orders notwithstanding, we do believe the company should be able to meet its targets for 2009 and Even if competition increases, Erbud should retain its net margins at or above 2.5%. What could significantly depress margins is a sharp increase in expenses across the construction sector, which will not happen before 2011, if at all. PLN 186.5m contract Erbud signed a contract to build a shopping center in Bytom worth PLN 186.5m (20% of 2009 revenue estimate) with Braaten+Pedersen plus Partners. Construction started in March, and is scheduled to end on November Erbud is set to receive a PLN 7.5m advance this month. Of the PLN 186m total, PLN 70m-worth of construction work will be completed in 2009, and the rest is set for % of the shopping space has been rented out already. Erbud s contract backlog is currently worth PLN 700m. The company is negotiating two contracts for up to PLN 100m, which it expects to be awarded in the next three months. 2 April

57 Mostostal Warszawa Mostostal Warszawa (Buy) Current price: PLN 47.5 Target price: PLN 63.6 ` Analyst: Maciej Stokłosa Last Recomm endation: Revenues % % % Number of shares (m) 20.0 EBITDA % % % MC (current price) EBITDA margin 4.1% 6.3% 6.5% 5.0% EV (current price) EBIT % % % Free float 18.7% Net profit % % % P/E Price change: 1 month 20.3% P/CE Price change: 6 month -5.8% P/BV Price change: 12 month -25.1% EV/EBITDA Max (52 w eek) 63.4 Dyield (%) Min (52 w eek) 36.3 We are reiterating a buy rating on Mostostal Warszawa (MW), which remains attractively priced even after a recent recovery from a February downturn. The company already has 40% of its capacity booked for 2010, and benefits from a good mix of revenue sources (about two-thirds of 2009 revenues will come from road contracts and specialized services). MW has curtailed contract acquisition efforts recently because its 2008 portfolio is full, but a few more infrastructure contracts could be added to the backlog in the next few months. 2 April

58 Analyst: Maciej Stokłosa Last Recomm endation: Revenues % % % Number of shares (m) 13.4 EBITDA % % % MC (current price) EBITDA margin 10.0% 12.9% 14.6% 12.7% EV (current price) EBIT % % % Free float 53.0% Net profit % % % P/E Price change: 1 month -4.7% P/CE Price change: 6 month -13.5% P/BV Price change: 12 month -42.0% EV/EBITDA Max (52 w eek) Dyield (%) Min (52 w eek) PBG PBG (Hold) Current price: PLN 192 Target price: PLN ` We are reiterating a hold rating on PBG. In spite of successful contract acquisition (2010 backlog is over 80% full), the company is overpriced based on an assumption of aboveaverage margins to be achieved in the long term. Meanwhile, current trends in environmental-engineering service prices are already forcing the company to make a choice between high margins and growing revenues. PBG is already making steps toward revising its margin policy, as evidenced by a bid on the Baltic Arena stadium which was 9% lower than the offer of the next highest bidder. That said, the company is going to see an improvement in earnings in the near term thanks to considerable savings on contract costs. Hydrobudowa makes best bid on Baltic Arena Hydrobudowa Polska and partner Alpine Bau submitted the lowest bid on a contract to build the Baltic Arena stadium in Gdańsk (PLN 427.7m). The next lowest bidders were Budimex (PLN 471.2m), Baugesellschaft Walter Hellmich with Pol-Aqua (PLN 477m), Polimex Mostostal with J&P Avax (PLN 486.7m), Hochtief with Warbud (PLN 490.8m), PORR, Strabag, and Zeman Dachy Fasady (PLN 491.4m), and a Chinese consortium (PLN 520.5m). Lowest bid at EUR 52.8m A consortium comprising Hydrobudowa 9, PRG Metro, and KWG placed the lowest bid in a tender for construction of a system which will be used to transfer sewage from the left bank of the Vistula river in Warsaw to the Czajka sewage treatment facility which is currently being modernized. The system is to be constructed using the microtunneling technique. The bid is for EUR 52.8m (PLN 250m). A consortium including Pol-Aqua bid EUR 55.5m, while a consortium of Max Mogl, Wuwa Bau and Alpine Bau bid EUR 67.2m. PBG is expecting Hydrobudowa Polska to generate e net income of PLN 100m this year. 2 April

59 Analyst: Maciej Stokłosa Last Recommendation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 5.5% 6.8% 6.7% 6.4% EV (current price) EBIT % % % Free float 58.8% Net profit % % % P/E Price change: 1 month 5.0% P/CE Price change: 6 month -31.0% P/BV Price change: 12 month -63.5% EV/EBITDA Max (52 w eek) 8.1 Dyield (%) Min (52 w eek) Polimex-Mostostal Polimex Mostostal (Buy) Current price: PLN 3 Target price: PLN We are reiterating a buy rating on Polimex, which is attractively priced and which is more than likely to deliver a PLN 154.3m profit this year. The company might see a very minor decline in the margins earned on steel products this year (41% of sales are to the energy industry, 15% are to chemical/petrochemical companies), but we believe that future revenues will be boosted by orders from power plants (the first of such contracts is expected to be awarded in late 2009). A1 motorway contract added to backlog Polimex Mostostal and Mostostal Zabrze are going to build a section of the A1 motorway connecting Sośnica with Maciejów. Of the total fee of PLN 900m, Polimex gets PLN 393m, and Mostostal Zabrze gets PLN 84.3m. Another stadium order Polimex Mostostal was awarded another contract related to renovation of the Wisła Kraków FC stadium in Krakow. The PLN 125.6m contract is equal to 2.6% of revenue estimated for April

60 Analyst: Maciej Stokłosa Last Recomm endation: Revenues % % % Number of shares (m) 69.6 EBITDA % % % MC (current price) EBITDA margin 3.1% 6.8% 5.0% 5.5% EV (current price) EBIT % % % Free float 19.5% Net profit % P/E Price change: 1 month 39.5% P/CE Price change: 6 month 12.4% P/BV Price change: 12 month -26.8% EV/EBITDA Max (52 w eek) 10.5 Dyield (%) Min (52 w eek) Rafako Rafako (Accumulate) Current price: PLN 6 Target price: PLN The recent increase in Rafako s stock price prompted a downgrade to accumulate. We have very conservative earnings forecasts for the company, which are based on the fact that it has few contracts scheduled for completion this year (Rafako recognizes a major portion of cost savings after finishing a contract). But this policy might change, and Rafako s CEO says that this year s net margin could reach 4%. We are inclined to raise our financial forecasts for the company either after approval of its 2009 budget, or after the Q109 earnings release. Rafako is set to sign a PLN 300m FGD contract with "Dolna Odra" Power Plant soon. We believe that future revenues will be boosted by orders from power stations (the first of such contracts is expected to be awarded in late 2009). 4% net margin in 2009 Rafako s CEO revealed his acquisition plans, which include an unnamed global player which owns complementary licenses and technology, and which operates in Asia, USA, Japan, and Australia. Merger talks could start in a few months, and last between 3 and 6 months, meaning that the Rafako family could gain a new member in In addition, Rafako is also eyeing smaller foreign firms holding desired patents, which were worth much more a few years ago. CEO Różacki believes that his company can improve earnings in 2009, and achieve a net margin of 4% (according to conservative predictions). This year s results could be boosted by a compensation from Donetskoblenergo. As for growth prospects, Rafako hopes to sign an PLN 300m FGD plant contract with the Dolna Odra power plant within a month. Later in the year, more orders for electrostatic precipitators are expected to materialize. 2 April

61 Analyst: Maciej Stokłosa Last Recomm endation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 5.5% 7.7% 9.5% 8.4% EV (current price) EBIT % % % Free float 38.8% Net profit % % % P/E Price change: 1 month 10.5% P/CE Price change: 6 month -23.3% P/BV Price change: 12 month -20.9% EV/EBITDA Max (52 w eek) 5.6 Dyield (%) Min (52 w eek) Trakcja Polska ` Trakcja Polska (Buy) Current price: PLN 3.9 Target price: PLN 6 We are reiterating a buy rating on Trakcja Polska (TP), which has strong earnings prospects ahead of it, supported by the expanding investment budget of its key account PKP PLK. The company is bidding for a lucrative track-maintenance contract ( LCS Ciechanów ) which could prompt a substantial upward revision in FY09 estimates. The contract will be awarded to the lowest bidder. TP s contract pipeline for 2009 is 85% full, but we expect it to be filled up within the first half of the year. We suspect that the company might complete long-awaited acquisitions this year Railroad budget under pressure National railroad-freight operator PKP Cargo is on the brink of bankruptcy, and needs PLN 0.5 billion to pay severance to 10,000 employees, and PLN 1 billion to buy new rolling stock. Vice- President of a parliamentary infrastructure committee Janusz Piechociński thinks that other subsidiaries of national rail operator the PKP (PKP PLK, PKP Intercity) could soon face the same cash problem. However, he believes that to give public aid to PKP Cargo would be a bad idea, and proposes that PKP PLK reduce track usage charges instead. PLN 167.2m contract Trakcja Polska signed a contract for the renovation and modernization of the E-30/CE-30 railway line, on the Opole-Wrocław-Legnica stretch, including the train station in Małczyce. The consideration is PLN 167.2m, i.e. ca. 16.5% of the revenue forecasted for FY2009. The deadline is 5 September PLN 38.1m contract Subsidiary PRK-7 made the best bid for a contract to modernize railroad route #223 from Orzysz to Ełk. The company offered PLN 38.1m (3.8% of 2009 revenue estimate). 2 April

62 Analyst: Maciej Stokłosa Last Recomm endation: Revenues % % % Number of shares (m) 5.3 EBITDA % % % MC (current price) EBITDA margin 48.7% 42.8% 36.6% 36.0% EV (current price) EBIT % % % Free float 24.5% Net profit % % % P/E Price change: 1 month 2.3% P/CE Price change: 6 month -66.8% P/BV Price change: 12 month -87.2% EV/EBITDA Max (52 w eek) Dyield (%) Min (52 w eek) Ulma Construccion Polska (Hold) Current price: PLN 31 Target price: PLN 30 We are reiterating a hold rating on Ulma in anticipation of Q109 results. Going forward, we expect a continued decline in formwork rental revenues, which will be deeper in case of basic building systems. Export sales will also stay low as global demand dwindles. We predict that downward trends in prices of subcontractor services, building materials, and rental formworks, will continue well into Ulma April

63 Analyst: Maciej Stokłosa Last Recomm endation: Revenues % % % Number of shares (m) 33.9 EBITDA % % % MC (current price) EBITDA margin 4.1% 6.6% 5.1% 3.5% EV (current price) EBIT % % % Free float 23.0% Net profit % % % P/E Price change: 1 month 24.6% P/CE Price change: 6 month -54.7% P/BV Price change: 12 month EV/EBITDA Max (52 w eek) 11.0 Dyield (%) Min (52 w eek) Unibep Unibep (Buy) Current price: PLN 4.3 Target price: PLN 4.9 ` We are reiterating a buy rating on Unibep as a long-term investment. Unibep has been unexpectedly successful in garnering new business, with PLN 207m-worth of contracts captured since the beginning of February. On a less positive note, Clover Group, owner of two development projects in Kazan and Sochi, Russia (worth a combined PLN 1 billion), decided to divide these projects into parts in order to reassure banks that they are safe to finance. As a consequence, Unibep s fees are more than certain to be reduced. Further, the company lost one of the prospective customers of its lightweight building systems factory set for a mid-2009 opening. All in all, in spite of these mixed messages, Unibep remains an attractive long-term investment. PLN 1bn revenue in 2011 CEO Mr. Mikołuszko expects a 10% increase in sales and achievement of a 3% minimum margin this year. The company has an ambition to generate PLN 1 billion in sales in 2011, and post a margin of 5%. The company s backlog is 80% full (or 90% if we include contracts which have been awarded but not yet executed). Unibep s real-estate business is expected to generate a revenue of PLN 80m this year, and sales to eastern markets are estimated at PLN 60m. The company is bidding for further orders from Russia with a combined value of PLN 450m. Office contract Unibep signed an agreement to build a 16.5 thousand-square-meter office building in Warsaw. The company and the project owner agreed that, in the absence of a confirmation from the latter that the project will go forward by June 2nd, 2009, the agreement will expire without penalty to either party. Construction is scheduled to last 13 months. The fee is quoted in euros, which exposes the company to forex risks until hedging is possible after the start of construction. Outlook for 2009 Unibep predicts that its road-building subsidiary can generate a revenue of PLN 40m this year, and over PLN 100m in subsequent years. The prefab-house factory should be ready in Q209, and is expected to post a revenue of ca. PLN 30m this year, but is not under pressure to generate a profit. 2 April

64 Real Estate Development Housing Sales volume falls 10 times; most sales are for cash According to a representative of the Warsaw Union of Real-Estate Brokers, the number of usedhome sales deals does not exceed 10-15% of what was recorded in the same period of last year. Most purchases are for cash (in , 80% of buyers were taking out mortgages). Mostly small apartments get sold, for PLN k. Home supply on the rise Analysts with Szybko.pl and Expander have noticed an increasing supply of resale homes. In February, Szybko.pl recorded a 50% surge in homeowner listings compared to December 2008, and a 70% surge in the last six months. More subsidized loans After a revision in the original caps set on eligible home values, as housing prices decline, the number of subsidized loans offered under the governmental Rodzina na Swoim program doubled in February. House construction costs down 30% The cost of building a house is down to its 2006 year-end level. A year ago, a house with an area larger than 450,000 square meters cost over PLN 450,000. Now, the cost is down to about PLN 335,000. A reduced demand for construction services has led to a decrease in subcontractor prices. For example, the price of thermal insulation and plastering of one square meter of wall is down from PLN a year ago to just PLN Demand for construction services has dwindled because of a considerable drop in housing starts caused by tight credit. Prices of building materials have decreased between 10% and 20%. Land prices on decline in Warsaw Developers and private owners are selling off investment land which they bought during the real-estate boom. Some lots in Warsaw suburbs have depreciated by over 60 percent over the past year. Public investors to buy projects from developers? The spokesman for the city of Warsaw confirmed that the city would like to buy land from hardpressed developers in order to use it for communal purposes. The city wants to wait, however, until developers reduce prices, i.e. until Q The President of the Military Housing Agency (WAM) is also considering purchases of land from the developers. The agency s budget is tight after cuts (from PLN 400m to PLN 160m, of which only PLN 50m is earmarked for investment), but a bank loan is a possibility. Commercial Development Shopping centers refuse to lower rent Shopping centers are refusing to adjust rental rates for the effects of a stronger euro (which are twofold in their case, leading to more expensive imports on the one hand, and higher rental income on the other). Clothing retailer Bytom hopes that the lessors will concede tenant requests to lower rent, but another fashion chain, Monnari, says that so far all efforts to convince them have proven futile. Gant, Budopol Wrocław No tender offer on Budopol? Gant is inclined to sell its stake in Budopol with an option to buy it back in the future, as part of efforts aimed at reducing debt. LC Corp Share buyback, 25 homes sold in Q The Supervisory Board does not object to a share buyback, but it does not like the proposed method. The buyback should be possible if the share price remains low, if there are no new projects, and if the Przy Promenadzie project generates financial surpluses. According to the CEO, in Q the company should sell 25 apartments, including 10 in March. 2 April

65 Orco Property Group Trading suspended on Euronext Due to a 2-week delay in the publication of the 2008 earnings report, Euronext suspended trading in Orco shares at the Management's own request. The WSE decided that trading would restart after a few days. The company s official press release stated that difficult conditions in the real estate and lending markets forced the Management to conduct a thorough review of the Group's strategic and operating options." Orco moved the release date of its unaudited 2008 earnings report from March 31st to April 7th. The audited statements are set for a release in mid-may. 2 April

66 Dom Development Dom Development (Hold) Current price: PLN 24.4 Target price: PLN 21.9 Analyst: Maciej Stokłosa Last Recomm endation: Revenues % % % Number of shares (m) 24.6 EBITDA % % % MC (current price) EBITDA margin 27.7% 24.1% 20.2% 6.2% EV (current price) EBIT % % % Free float 20.0% Net profit % % % P/E Price change: 1 month 29.5% P/CE Price change: 6 month -20.2% P/BV Price change: 12 month -67.8% EV/EBITDA Max (52 w eek) 77.3 Dyield (%) Min (52 w eek) 14.8 On the face of it, Dom Development (DD) appears to be one of the safest investments in the sector. Its debt is at relatively low levels (net debt PLN 272.1m, short-term debt at a mere PLN 62.5m, with PLN 223.7m in cash). We expect the company s sales to be fairly good thanks to an attractive housing inventory (mostly affordable homes). DD faces little risk of pre-sales cancellations by customers (it does not use the 10/90 payment system)., and has no subsidiaries which could face problems when real-estate development projects are suspended. We nonetheless believe all this has already been discounted. We see no reason to increase exposure to Dom Development because we do not believe the value of its assets is significantly above its market cap. We do see an opportunity for the company's value to gradually increase thanks to the decisions and actions of the Management, but we believe it is too early to price this in. As we see no reasons why Dom Development share price should increase faster than average, we recommend holding the stock. 2 April

67 J.W. Construction ` J.W. Construction (Buy) Current price: PLN 7.1 Target price: PLN 10.3 Analyst: Maciej Stokłosa Last Recomm endation: Revenues % % % Number of shares (m) 54.7 EBITDA % % % MC (current price) EBITDA margin 27.1% 20.9% 24.4% 17.4% EV (current price) EBIT % % % Free float 18.0% Net profit % % % P/E Price change: 1 month 46.0% P/CE Price change: 6 month -50.0% P/BV Price change: 12 month -79.9% EV/EBITDA Max (52 w eek) 36.6 Dyield (%) Min (52 w eek) 4.0 We believe that J.W. Construction (JWC) assets offer real value to shareholders (they are valued below liquidation value). The company has extensive yet relatively cheap landholdings (high share of peripheral locations); as a result, land accounts for a mere 26.7% of its valuation. J.W. Construction boasts the highest share of pre-sold homes among the developers in our coverage universe (76%). When homes are transferred to buyers, this will provide significant cash flows and improve the company's balance sheet. We forecast the company s net income as of year-end 2009 at PLN 212.4m, assuming that no new project is launched (PLN 599.5m at year-end 2008). High positive cash flows can also be expected because of the "10/90" sales system the company uses. On the other hand, it means that JWC faces the risk of customer cancelations if they are unable to obtain financing. We expect net pre-sales (i.e. after cancelations) to be slightly negative in JWC. has its own construction workforce, which means that it will be able to reduce costs on an ongoing basis. As a result, the company will show higher margins than its competitors without their own construction subsidiaries. All in all, despite the high short-term debt as of year end 2008, we are not worried about the company s future, due to the fact that its assets are worth much more than their book value implies. We recommend buying J.W. Construction with a target price of PLN Price cuts will not affect margins According to main shareholder Józef Wojciechowski, JWC can cut the prices of the dwellings which were booked and then cancelled by buyers by 10% to 15% without affecting margins, because the buyers paid withdrawal penalties. Mr. Wojciechowski observed a pickup in sales in February (when JWC sold 50 apartments), which continued in March. JWC is looking for tenants for two future office buildings in Warsaw and Szczecin. JWC branches out into road development JWC is in talks with a foreign partner concerning establishment of a road-building company. There are no foreign players operating in the Polish road construction market at the moment. 2 April

68 Polnord Polnord (Buy) Current price: PLN 27.3 Target price: PLN 35 Analyst: Maciej Stokłosa Last Recomm endation: Revenues % % % Number of shares (m) 18.1 EBITDA % % % MC (current price) EBITDA margin 25.1% 31.7% 30.2% 7.2% EV (current price) EBIT % % % Free float 36.0% Net profit % % % P/E Price change: 1 month 24.1% P/CE Price change: 6 month -46.3% P/BV Price change: 12 month -76.9% EV/EBITDA Max (52 w eek) Dyield (%) Min (52 w eek) 19.8 We believe that the discussion of the valuation of Polnord should concentrate on the value of its land assets. A key development to watch for might be the sale of land to the city for schools and roads, which might take place in At present, we consider the generally high share of land assets in Polnord s book value to be a risk factor. In its case, however, land assets are of fairly high quality; moreover, they were bought at decent prices, even if we take into account the fact that the period in question was the peak of the housing boom. As a result, despite the fact that land accounts for a whopping 59.1% of valuation, the difference between book and replacement value does not exceed 30% (assuming that housing prices fall by 30%). As much as 70.7% of the company s land holdings are located in Warsaw s borough of Wilanów. In the near future, we do not predict significant surprises in quarterly performance. We do see the possibility that some clients will withdraw from previously-signed agreements ("10/90" sales system used for the "Ostoja" projects in Wilanów, 23% of the company's total offering). The impact of the company s exposure to the Russian market is also limited (without the margin earned on Russian commercial projects, its value goes down by 2.3%, with no margin at all earned on any Russian projects, by 3.1%). To sum up, because of the high value of its assets, we recommend buying Polnord. Polnord buys land from Prokom Polnord purchased one-third of a land lot located in Dopiewiec near Poznań, with a total area of hectares, for a net price of PLN 24m. The zoning permit for the lot earmarks it as a multifamily-housing development site, and partly as a site which could house educational and cultural facilities. Polnord plans to develop at least 120 square meters of living space on the site. In consideration of the land, Prokom is going to take up a batch of Polnord stock with a value equivalent to the land value. The share value was established as a 30-day average (PLN 23.13), and suggests that Polnord is going to issue million shares. 2 April

69 Retail Emperia Holding (Buy) Current price: PLN 45 Target price: PLN 70.3 Analyst: Kamil Kliszcz Last Recomm endation: Revenues % % % Number of shares (m) * 15.1 EBITDA % % % MC (current price) * EBITDA margin 3.9% 2.9% 3.4% 3.6% EV (current price) * EBIT % % % Free float 71.0% Net profit % % % P/E Price change: 1 month -10.4% P/CE Price change: 6 month -41.6% P/BV Price change: 12 month -70.4% EV/EBITDA Max (52 w eek) Dyield (%) Min (52 w eek) 40.5 * incl. stock issue to BOS sharehodlers Emperia failed to win the confidence of investors in March, and, like its competitor Bomi, underperformed the broad market (-8.5% vs. +11% for the index) and other FMCG players including Alma and Eurocash. The medium-term outlook for the company is good, and the internal integration completed in 2008, paired with operations streamlining and expected revenue growth, will improve this year s EBITDA compared to last year s results Emperia Holding April

70 Analyst: Kamil Kliszcz Last Recomm endation: Revenues % % % Number of shares (m) EBITDA % % % MC (current price) EBITDA margin 2.6% 2.6% 2.5% 2.6% EV (current price) EBIT % % % Free float 30.0% Net profit % % % P/E Price change: 1 month 5.9% P/CE Price change: 6 month -18.2% P/BV Price change: 12 month -29.1% EV/EBITDA Max (52 w eek) 13.3 Dyield (%) Min (52 w eek) Eurocash Eurocash (Accumulate) Current price: PLN 9 Target price: PLN 9.9 Eurocash shares recovered from a months-long weakness, and went hand in hand with the broad market in March, gaining 15%. We believe that the company will meet the 2009 EBITDA target of PLN 186m which, given the negative FY2008 net debt, implies a FY09E EV/EBITDA ratio of 6.0. This is not a level which encourages aggressive buying in the current environment, and we would advise investors to accumulate Eurocash stock on weakness. An acquisition could serve as a catalyst for a hike in the company s share value, but it seems to us that prices of the potential targets will be more attractive in the second half of the year. Społem up for grabs? According to reports, KAH Społem, the wholesale supplier of the Społem cooperative of food retailers, has settled with creditors, and plans to resume operations. It is coming back as a purchasing center for the co-op stores, buying from one external wholesaler who will become its strategic partner. Eurocash is the most likely candidate for the job. To date, Eurocash has supplied food products to Społem on a very small scale because this type of cooperation did not fit with its growth strategy. But now that that the company is successfully developing the Delikatesy Centrum franchise, some of the Społem stores in good locations could make for good customers. That said, Eurocash is committed to the franchise model, and most Społem stores are not likely to want to rebrand. It is too early to estimate the merits of these reports. Note that most regional Społem co-ops have not been buying from KAH, but made independent purchases from Emperia wholesalers, and will probably stick with this arrangement for now. 2 April

71 Others Mondi (Hold) Current price: PLN 53.5 Target price: PLN 54.2 Analyst: Michał Marczak Last Recommendation: Revenues % % % Number of shares (m) 50.0 EBITDA % % % MC (current price) EBITDA margin 24.8% 21.7% 20.1% 23.7% EV (current price) EBIT % % % Free float 19.0% Net profit % % % P/E Price change: 1 month 20.3% P/CE Price change: 6 month -5.8% P/BV Price change: 12 month -25.1% EV/EBITDA Max (52 w eek) 63.4 Dyield (%) Min (52 w eek) Mondi The price of Mondi shares matches our target, prompting a downgrade from buy to hold. As prices of corrugated board paper decline and the probability of a stronger zloty increases, we are keeping our financial forecasts for the company intact. Paper prices down in March Compared to February, the average prices of kraftliner declined 3.7% in March, prices of testliner retreated 4.6%, and fluting fell 6.3%. In addition, the average Euro/PLN exchange rate decreased 0.9%. Price averages do not fully reflect the scale of the downtrend and the situation in different business periods. At the end of March, kraftliner was over 9% cheaper than a month earlier, and prices of testliner and fluting plunged 11.9% and 16.8% respectively. The zloty is expected to strengthen in the coming weeks, further affecting Mondi s euro prices. Finally, sales are expected to be significantly weaker in Q April