Buyout rumors fuel Stomil, Dzbica, but firms ride different roads
Warsaw-based analysts say now is the time to buy before majority shareholders, Goodyear in Dzbica and Campagnie Finansiere Michelin in Stomil Olsztyn consolidate holdings - lock, stock and barrel.
"There is widespread speculation that they will both try to control the companies and then delist (them)," said Artur Szeski, an analyst at CDM Pekao Securities. It is not common for either company's subsidiaries to be listed as publicly traded companies, he added.
That speculation has gained further fuel from the current wave of consolidation on the market. The most notable move came from Rubbermaid, which recently bought up remaining shares of Dom-Plast in its effort to delist the rubber maker from public trading. Goodyear and Michelin each bought into the tire makers more than two years ago as part of the government's privatization plan for the firms.
"It looks like they will buy them out," said an analyst who asked not to be named. "To buy out minority shareholders, they will have to offer them a very good price, but it could be in two months or two years."
The threat of new rules protecting minority shareholders could speed such buyouts, analysts said. There is widely believed speculation that Goodyear might increase its 59.9% stake in Dzbica before the end of the year, added Andrzej Knigawka, equity analyst at CA IB Securities.
The Securities Commission (KPWiG) is set to complete work on new rules to protect minority shareholder rights before the year is out, Knigawka said. So, now would be the most opportune moment for the strategic investor to strike, he said. "A wave of acquisitions and public bids over the last three months confirms this view," Knigawka said.
However, share prices in Dzbica and Stomil have taken divergent paths during the first half of the year. Dzbica dropped 6% during the first six months of 1999, while Stomil's shares climbed 23%, Deutsche Bank Research noted in a market report dated Aug. 6. However, Dzbica's drop prompted Deutsche to change its recommendation to buy from market perform.
"We decided to upgrade our rating for Dzbica ... mainly due to the stock's negative YTD (year-to-date) performance," Deutsche said in the report. Deutsche said it upgraded the recommendation despite a poor, first-half financial performance. "We believe that the employment-restructuring plan in Dzbica, which resulted in zł. 11.8 million ($3.02 million) provisions booked in May this year, should bring benefits starting from 2000," Deutsche said.
The restructuring program, which should account for zł. 14 million ($3.59 million) in cost savings per year, will make the company more efficient and similar to its Western peers, said Jacek Radziwilski, an analyst at Deutsche Bank Research in Warsaw.
Stomil will perform better in the short term, while the Dzbica recommendation is part of a longer-term scenario, Radziwilski said. Deutsche forecasts Dzbica's 1999 net profit to fall 4% compared to last year to zł. 74 million ($18.9 million) before turning around next year. He forecasts 2000 net profit will rise 21% to zł. 89.7 million ($23 million).
Stomil, however, is on a faster growth track. Profit this year is expected to rise 27% to zł. 60.8 million ($15.2 million) and next year 42% to zł. 86.6 million ($21.6 million), Radziwilski said. Based on projected 1999 earnings, Stomil was trading at a price to earnings (p/e) ratio of 9.6 and Dzbica had a p/e of 9 at the close of trading Thursday, he said.
Dzbica is still restructuring, something Stomil has already done and those effects were visible in half year results. Dzbica's half year operating profit dropped 37% to zł. 25.4 million ($6.51 million) this year from zł. 40.4 million ($11.54 million) in the same period last year. Net profit paralleled the decline, slumping 32% to zł. 24.5 million ($6.28 million) in the first half from zł. 46.3 million ($13.23 million) in first half 1998, said Knigawka of CA IB Securities. Sales, however, rose slightly at 1.1% from zł. 420 million ($120 million) to zł. 424 million ($108.71 million), he said.
"We are currently revising our earnings estimate for Dzbica," said CA IB's Knigawka. "But we are seeing Stomil Olsztyn trading at a 15% premium to Dzbica at current prices." He also said that now is a good time to buy Dzbica, but only within the next 12 months, by which time the restructuring process is likely to take effect.
In contrast to Dzbica, Stomil's half year net sales rose 8%, operating profit went up 12% to zł. 58.2 million ($14.92 million) and net profit jumped 11% to zł. 28.8 million ($7.38 million), Knigawka said.
Deutsche Bank gave Stomil a buy recommendation in March. "The Polish car market is expanding," said Radziwilski. "Both demand for tires for new cars, and demand for tires for cars being used, will increase. That is why such companies are attractive."
At present the passenger car tire market is very profitable, especially replacement tires, said Stephen Pettyfer, an analyst at Merrill Lynch. To this end, Stomil, in which Michelin has a 53.6% stake, previously a tire manufacturer for just agricultural vehicles, increased its presence in this market from 1994 onwards, Pettyfer said.
New market entrant Bridgestone is beginning heavy investment in Stomil Poznań, but that won't have a significant near-term affect on the market, analysts said.
The financial performance of Stomil Olsztyn and Dzbica reflects majority shareholder strategies with the tire makers, analysts said. Differences also exist between Goodyear and Michelin in their treatment of minority shareholders, they said.
In Dzbica, "there is no information policy for minority shareholders," said Knigawka. "They can't get basic information apart from what is published in the reports" leaving these as their only means of influencing the company's performance, he said.
By contrast, "Stomil (Olsztyn) is much more open than Dzbica to minority investors," said Radziwilski. "They are not so aggressive in terms of bringing profit to the strategic investor," more of which is left with the company and goes back to minority shareholders than its competitor, he said.
Goodyear is using Dzbica as a springboard for its expansion across Central and Eastern Europe, which has pushed up the Polish company's costs, said Knigawka, citing a recent announcement of a $100 million program for a regional logistics center to be used by Goodyear's subsidiaries. And while Dzbica is only just starting to develop a large investment scheme, Stomil has finished its capital expenditure program with strong prospects for growth in sales and profits, he said.
Stomil has spent almost $151 million on the program, to be finished this year, with most of the investment put into improving existing production holes' capability, according to Stomil.
In addition, Michelin is focussing on the export market, said Radziwilski. Stomil has been selling aggressively through the Michelin distribution network, with over 50% of company sales this year going abroad, said Knigawka. "Goodyear is more concerned with its strategic program in the region than Dzbica's results," he said.
Both companies have holdings in other tire companies in the region, Michelin in Hungarian company Taurus and Goodyear in Slovenian firm Sava, said Pettyfer of Merrill Lynch. But Goodyear is probably looking at its empire and maximizing its returns elsewhere in Western Europe, rather than concentrating on Dzbica's returns, Pettyfer said. "Dzbica is a small part of a larger strategic puzzle," he said.
"There is widespread speculation that they will both try to control the companies and then delist (them)," said Artur Szeski, an analyst at CDM Pekao Securities. It is not common for either company's subsidiaries to be listed as publicly traded companies, he added.
That speculation has gained further fuel from the current wave of consolidation on the market. The most notable move came from Rubbermaid, which recently bought up remaining shares of Dom-Plast in its effort to delist the rubber maker from public trading. Goodyear and Michelin each bought into the tire makers more than two years ago as part of the government's privatization plan for the firms.
"It looks like they will buy them out," said an analyst who asked not to be named. "To buy out minority shareholders, they will have to offer them a very good price, but it could be in two months or two years."
The threat of new rules protecting minority shareholders could speed such buyouts, analysts said. There is widely believed speculation that Goodyear might increase its 59.9% stake in Dzbica before the end of the year, added Andrzej Knigawka, equity analyst at CA IB Securities.
The Securities Commission (KPWiG) is set to complete work on new rules to protect minority shareholder rights before the year is out, Knigawka said. So, now would be the most opportune moment for the strategic investor to strike, he said. "A wave of acquisitions and public bids over the last three months confirms this view," Knigawka said.
However, share prices in Dzbica and Stomil have taken divergent paths during the first half of the year. Dzbica dropped 6% during the first six months of 1999, while Stomil's shares climbed 23%, Deutsche Bank Research noted in a market report dated Aug. 6. However, Dzbica's drop prompted Deutsche to change its recommendation to buy from market perform.
"We decided to upgrade our rating for Dzbica ... mainly due to the stock's negative YTD (year-to-date) performance," Deutsche said in the report. Deutsche said it upgraded the recommendation despite a poor, first-half financial performance. "We believe that the employment-restructuring plan in Dzbica, which resulted in zł. 11.8 million ($3.02 million) provisions booked in May this year, should bring benefits starting from 2000," Deutsche said.
The restructuring program, which should account for zł. 14 million ($3.59 million) in cost savings per year, will make the company more efficient and similar to its Western peers, said Jacek Radziwilski, an analyst at Deutsche Bank Research in Warsaw.
Stomil will perform better in the short term, while the Dzbica recommendation is part of a longer-term scenario, Radziwilski said. Deutsche forecasts Dzbica's 1999 net profit to fall 4% compared to last year to zł. 74 million ($18.9 million) before turning around next year. He forecasts 2000 net profit will rise 21% to zł. 89.7 million ($23 million).
Stomil, however, is on a faster growth track. Profit this year is expected to rise 27% to zł. 60.8 million ($15.2 million) and next year 42% to zł. 86.6 million ($21.6 million), Radziwilski said. Based on projected 1999 earnings, Stomil was trading at a price to earnings (p/e) ratio of 9.6 and Dzbica had a p/e of 9 at the close of trading Thursday, he said.
Dzbica is still restructuring, something Stomil has already done and those effects were visible in half year results. Dzbica's half year operating profit dropped 37% to zł. 25.4 million ($6.51 million) this year from zł. 40.4 million ($11.54 million) in the same period last year. Net profit paralleled the decline, slumping 32% to zł. 24.5 million ($6.28 million) in the first half from zł. 46.3 million ($13.23 million) in first half 1998, said Knigawka of CA IB Securities. Sales, however, rose slightly at 1.1% from zł. 420 million ($120 million) to zł. 424 million ($108.71 million), he said.
"We are currently revising our earnings estimate for Dzbica," said CA IB's Knigawka. "But we are seeing Stomil Olsztyn trading at a 15% premium to Dzbica at current prices." He also said that now is a good time to buy Dzbica, but only within the next 12 months, by which time the restructuring process is likely to take effect.
In contrast to Dzbica, Stomil's half year net sales rose 8%, operating profit went up 12% to zł. 58.2 million ($14.92 million) and net profit jumped 11% to zł. 28.8 million ($7.38 million), Knigawka said.
Deutsche Bank gave Stomil a buy recommendation in March. "The Polish car market is expanding," said Radziwilski. "Both demand for tires for new cars, and demand for tires for cars being used, will increase. That is why such companies are attractive."
At present the passenger car tire market is very profitable, especially replacement tires, said Stephen Pettyfer, an analyst at Merrill Lynch. To this end, Stomil, in which Michelin has a 53.6% stake, previously a tire manufacturer for just agricultural vehicles, increased its presence in this market from 1994 onwards, Pettyfer said.
New market entrant Bridgestone is beginning heavy investment in Stomil Poznań, but that won't have a significant near-term affect on the market, analysts said.
The financial performance of Stomil Olsztyn and Dzbica reflects majority shareholder strategies with the tire makers, analysts said. Differences also exist between Goodyear and Michelin in their treatment of minority shareholders, they said.
In Dzbica, "there is no information policy for minority shareholders," said Knigawka. "They can't get basic information apart from what is published in the reports" leaving these as their only means of influencing the company's performance, he said.
By contrast, "Stomil (Olsztyn) is much more open than Dzbica to minority investors," said Radziwilski. "They are not so aggressive in terms of bringing profit to the strategic investor," more of which is left with the company and goes back to minority shareholders than its competitor, he said.
Goodyear is using Dzbica as a springboard for its expansion across Central and Eastern Europe, which has pushed up the Polish company's costs, said Knigawka, citing a recent announcement of a $100 million program for a regional logistics center to be used by Goodyear's subsidiaries. And while Dzbica is only just starting to develop a large investment scheme, Stomil has finished its capital expenditure program with strong prospects for growth in sales and profits, he said.
Stomil has spent almost $151 million on the program, to be finished this year, with most of the investment put into improving existing production holes' capability, according to Stomil.
In addition, Michelin is focussing on the export market, said Radziwilski. Stomil has been selling aggressively through the Michelin distribution network, with over 50% of company sales this year going abroad, said Knigawka. "Goodyear is more concerned with its strategic program in the region than Dzbica's results," he said.
Both companies have holdings in other tire companies in the region, Michelin in Hungarian company Taurus and Goodyear in Slovenian firm Sava, said Pettyfer of Merrill Lynch. But Goodyear is probably looking at its empire and maximizing its returns elsewhere in Western Europe, rather than concentrating on Dzbica's returns, Pettyfer said. "Dzbica is a small part of a larger strategic puzzle," he said.
