First quarter results show rebound yet to come

For investors looking for a recovery on the Warsaw Stock Exchange, Eastern Europe's largest bourse, a weak batch of first-quarter results may indicate that a longer wait is order, analysts said last week. Earnings at large-cap stocks were again hit by the worst slowdown in a decade but investors focused on cost-cutting efforts, which should help an economic recovery expected later in the year to feed through to earnings. Telekomunikacja Polska (TPSA) posted an 84% slump in net earnings but investors latched on to an improved outlook from management for full-year sales growth and profits to drive the telecom company's stock up more than 9%. International buying helped TPSA reclaim the mantle of the region's biggest stock with a $5 billion market capitalization. That sparked a broader rally in the WIG 20 index, which rose to bring gains for the year to 13%. "Foreigners are buying TPSA on its upbeat outlook, and other investors have followed suit, buying the whole WIG 20 index," said Paweł Wojtaszek, derivatives salesman at Erste Securities. "But this has nothing to do with the overall results, which were dreadful." Sluggish credit growth and growing provisions for bad loans hit the heavily weighted banking sector, while falling demand cut into earnings at computer, media and telecom firms, forcing many to undertake long-delayed restructuring programs.

Year-end improvement Expectations of more downbeat figures in the quarters ahead are likely to prevent Warsaw from matching gains in Budapest and Prague, which have both gained around 20% this year on stronger economic growth. "Second-quarter results will likely be no better than those in the first three months," said Ewa Radkowska, a portfolio manager at ING Investment Management. "Probably we will see some improvement before the end of the year along with an economic rebound." Poland, the largest of the 10 mostly post-communist countries that want to join the European Union in 2004, has suffered from a triple whammy of stagnant growth, high real interest rates and a strong złoty. Economic growth, which peaked at 7% in the late 1990s, is at a near standstill. The government expects it to reach around 1% this year and 3% in 2003. "In the long run, the shock that we have right now will benefit companies," said Rafal Wiatr, head of market research at Citigroup's Bank Handlowy. "It's like taking a cold shower to build up your body's resistance." Looking a year ahead, one London-based portfolio manager said he reckoned Poland was a better bet than Hungary, which is showing signs of economic strain and could be forced to start raising interest rates soon. "Poland is at a different point of its economic cycle. With interest rates and the cost of capital coming down, you'd expect to see a pickup," said the manager, who requested anonymity. "On a 12-month horizon, we prefer Poland to Hungary."

Cost-cutting drive Largest listed financial institution Bank Pekao, which boosted earnings by 32% in the first quarter and maintained its full-year target at a record zł. 1.4 billion ($350 million), has been a prime example of tight cost control. By bringing its cost to income ratio, a key profitability measure, down to a record low for the sector of under 50%, Pekao bucked a negative industry trend and kept its position as a top regional stock pick. By contrast, smaller peer Kredyt Bank reported a 87% slump in profits partly due to hefty loan provisioning, and BPH-PBK's earnings fell by a third as a bad credits burden added to high restructuring costs. Media group Agora and hotel chain Orbis also took steps to boost profitability, either through layoffs or disposing of non-core assets, but they were overwhelmed by slumping sales. "We see significant cost-cutting efforts, for example in Orbis and Agora," said Wiatr. "But what is hurting them is that the top line is deteriorating faster than they can cut costs." Agora, whose earnings more than halved to zł. 17 million ($4.25 million) and sales shrank 16% to zł. 166 million ($41.5 million), warned it expected no turnaround until the end of the year. Orbis revenues fell 12% and its net loss nearly doubled to zł. 16 million ($4 million). High-techs Prokom Software and its small rival ComArch also saw sales shrink substantially after their corporate clients slashed spending on computer services. - Reuters