Come and get it
By : Jeffrey Sparshott
The Warsaw Stock Exchange (WSE) (http://www.wse.com.pl) has lost more than 16% of its value since Jan. 1, and almost 25% during the past year. Blue chip stocks have been hit harder than the general market, and tech and telecom stocks hardest of all.
Full steam ahead: PKN Orlen is one of the country's top stocks
So now is a good time to buck the trend and invest.
"I would say that generally we're positive on Central and Eastern Europe," said Gale Kirking, head of Central and Eastern European equities research for Germany's Erste Bank. "What makes us really positive are two things: First, we see a very strong macroeconomic situation as the countries move toward the European Union (EU); And at the same time, share prices have been pushed down by influences that have little to do with Central and Eastern Europe."
Below is a list of companies that brokers name as some of the best stocks to include in a long-term portfolio up to two years with the idea that they will perform better than the market. However, they do issue some caveats, including warnings about the unpredictability and fast-changing nature of the Polish market.
Each of the following stocks was named by at least two brokers or analysts surveyed by the WBJ as a strong possibility not just to weather the vagaries of the market, but to perform relatively well.
TPSA
Telekomunikacja Polska's (TPSA) (http://www.tpsa-ir.com) share price has dipped more than 35% since the same time last year and the telecom giant announced last week that its unconsolidated net profit for the first three months of the year fell 18.6% to zl. 403.3 million ($100.8 million). But its dominant position in the market as the principal telecommunication services provider makes it a strong candidate for a Central European portfolio. TPSA had 10.2 million fixed-line subscribers at the end of last year and retains exclusive rights to provide wire-line international services. At the end of 2000, company sales were up three years in a row zl. 15.89 billion ($3.97 billion) for 2000, a 20.7% jump from 1999.
"We think TPSA is a very good long-term pick," Kirking said of the largest company listed on the WSE.
Market sentiment toward telecom companies around the world has been poor. TPSA's diving share price has stalled its ongoing privatization. France Telecom (FT) and a Polish partner, Kulczyk Holding, purchased a 35% stake of TPSA from the government last July for zl. 38 per share. The consortium has the option to buy another 10% stake of TPSA from the treasury in July and an additional 6% stake in a public share offering scheduled for this year, giving it a majority stake. But FT has deemed the zl. 38 per share price too high and is negotiating a new offer with the treasury.
Pekao
Polish banks are often favorites of international investors because they are large and financially liquid institutions and generally have a large free float of stock. As the largest listed bank in Poland, Pekao bank (http://www.pekao.com.pl)stands out.
Pekao has a "strong position in the banking sector," said Robert Sobieraj, an analyst with Dom Maklerski Banku Handlowego. "Tight cost control will help to improve results in the future and (it has) the most liquid shares in the market, making it a good candidate for strong growth through the next two years."
The company's share price has increased by more than 25% through the past year and it has the second-greatest market value of any company listed on the WSE. Pekao bucked a first-quarter trend among listed companies by posting net profits of zl. 230.4 million ($57.6 million), up 53.8% from last year. In February the company announced that its 2001 target is zl. 1.25 billion ($312.5 million) in net profit.
UniCredito Italiano, one of Italy's largest banks, bought into Pekao in August 1999 and today commands a majority position in the company.
PKN Orlen
Polski Koncern Naftowy Orlen (PKN Orlen) (http://www.orlen.pl) has been rocked by bad news this month. The oil refiner and marketer reported a first-quarter net loss last week, surprising analysts and sending the company's stock south. The oil company said it hit an unconsolidated loss of zl. 15.7 million ($3.93 million), compared with a zl. 131.7 million ($32.93 million) profit in the same period in 2000. The group's consolidated net profit fell 4.4% from 1999 to 2000. The company blamed a seasonal fall in demand and slow economic growth for the decline. Analysts suspect additional problems have been created by the company's short-term purchasing strategy. The stock slipped 1.9% following the quarterly report, and is down close to 20% over the course of the past year.
Despite some weak figures, the regional picture for PKN Orlen and its counterparts in other countries is promising. The company is considered ripe for a merger with a big regional company Hungary's MOL or Austria's OMV, for example and a solid long-term investment.
"Strengthening ties between PKN (Orlen) and Hungarian MOL if this will finally happen, this will create additional value," said Marcin Materna, an investment adviser at Dom Maklerski BIG-BG.
Poland's largest crude oil refiner and petrochemical manufacturer merged with the country's leading distributor of motor fuels in September 1999 to create PKN Orlen. The company was listed later that year.
PBK
Powszechny Bank Kredytowy (PBK) (http://www.pbk.pl) is a retail and commercial bank privatized and listed on the WSE in 1997. As is the case with several of the companies on this list, it is a favorite, not just because of what it is, but because of what it will become. PBK is hooking up with the Krakow-based Bank Przemyslowo-Handlowy (BPH) because the institutions' strategic investors, Germany's Bayerische Hypo Vereinsbank, which owns about 86% of BPH, and Bank Austria, which has a 57% stake in PBK, are merging.
"The merger with BPH will create the third largest bank in Poland," Sobieraj said. There is "significant potential for earnings improvement (and) greater liquidity of shares after the merger."
PBK's preliminary unconsolidated net profit fell to zl. 37.7 million ($9.43 million) in the first quarter of 2001, down 57% from the same period in 2000. The share price suffered a loss following the announcement and is well below this year's high of zl. 123. But, reflecting strong sentiment toward the company's long-term prospects, its stock is up slightly compared to a year ago.
ComputerLand
Technology stocks have taken a beating during the past year. The TechWIG has plunged about 56% from its 52-week high. ComputerLand (http://www.computerland.pl)'s TechWIG colleagues have lost heavily since a year ago: ComArch is down close to 70%, Optimus more than 60%, Prokom about 35%, and Softbank 75%. ComputerLand has slipped about 7%.
"The IT-related titles have fallen out of favor in the past year or so, but we like Computerland," Kirking said. "It has rebuilt itself from a hardware reseller into a value-added services provider. This is a real company with real earnings."
In the first quarter of 2001, ComputerLand recorded a net profit increase of 18% to zl. 3.2 million ($800,000) and a revenue boost of 13.3% compared with the same period in 2000. The company said the improved results are largely from a contract with Wielkopolski Bank Kredytowy (WBK) and Bank Zachodni for back-office management systems in the banks. Analysts warn that the rest of 2001 could be tough for tech companies as an apparently slower economy limits corporate investments and this fall's elections could hamper government contracts, but the long-term outlook remains positive.
Kety
Zaklady Metali Lekkich Kety, located near Wadowice, is an old-economy industry founded under communist central planning in 1953. The company survived the transition to capitalism and is now considered a success as the largest aluminum company in Poland, making flexible packaging and extruded metal products.
The firm is characterized by "well-diversified activity, high management quality, (an) effective restructuring program (and) forecasted profits growth above average on the market," said Monika Cebula, an analyst with Dom Maklerski Banku Handlowego.
The company is projecting zl. 42.6 million ($10.7 million) net profits in 2001, up a healthy 143% from 2000. The treasury remains the largest single shareholder with 16% of the company's stock, but overall ownership is spread among banks, investment firms, equity funds and individuals. The company's stock is down more than 25% since a year ago.
Jelfa
In the interest of a balanced portfolio, pharmaceuticals offer a relatively safe investment with the possibility of steady growth. Jelenia-Gora-based Przedsiebiorstwo Farmaceutyczne Jelfa manufactures drugs for people and animals and, according to the company, is the biggest Polish producer of ointments and the leading manufacturer of hormonal drugs, cardiological drugs and multivitamins. Jelfa has significant exports, especially to former Soviet Union and Soviet bloc states. Its unconsolidated net profit rose 55% to zl. 14.5 million ($3.63 million) in the first quarter of 2001 compared with the same period of 2000, preliminary results indicated.
The company is enjoying growing profitability due to portfolio restructuring and cost cutting, and should benefit from a forecast increase in demand for cheaper domestic drugs and exposure to the fast growing Russian pharmaceutical market, Cebula said. Also, the share price could benefit from the likely sale of a 30% stake to a strategic investor, she added.
Major shareholders include the treasury, with 35%, Powszechny Zaklad Ubezpieczen (PZU) and its subsidiaries, with about 10%, and pension fund Commercial Union PTE BPH CU WBK, with 5%. The company's stock is up more than 6% since a year ago.
Buyer Beware
Despite strong prospects for the economy and equities market, brokers remain concerned on several fronts.
"Two years is almost impossible to predict, at least in Poland," said Piotr Kazimierski, co-head of equity sales at SG Securities. "You need good stocks with healthy fundamentals and companies with major shares in their market."
"Prospects are difficult to assess," said Artur Szeski, director of research for CDM Pekao brokerage house. "The market is looking for direction and hoping new interesting companies will come to the market. The large privatizations are running dry and there is a lack of small private companies coming to the market and raising funds."
As privatizations continue, more companies will come on the market the country's biggest insurer and bank, for example but no definite time frame has been set for public offerings.
Still, the WSE benefits from the largest regional economy, strong prospects for growth in Poland through the next few years, pending EU accession and pension funds, which are the largest institutional investors in the market and help to maintain market capitalization, analysts agree.
