Take off at the WSE
By : Bogda Zukowska
As the Warsaw Stock Exchange (WSE) enters its first decade, a brace of initial public offerings (IPOs) promises to re-energize the bourse, injecting new blood and vital liquidity onto the trading floor.
But making the biggest waves among brokers is the launch of several dotcom companies the first in Poland. The new economy IPOs will be spearheaded by the Krakow-based Interia.pl and followed by Hoga.pl, Arena.pl and Getin Service Provider later this year.
Interia.pl plans to make its listing debut on the WSE on Feb. 2, following its open tranche subscription scheduled for Jan. 24-29. Owned by Krakow-based systems integrator ComArch and national radio station RMF FM, the company is the first Internet portal in the region to be listed on a bourse.
Interia's management board anticipates a cash injection of about $11 million-$20 million from the sale of 1.64 million shares, about 25% of its capital. The company's vice president, Grzegorz Wojcik, said Interia did not meet the WSE's regular listing requirements, but was able to debut thanks to the exchange's relaxed requirements under SiTech, a special grouping of IT and telecom stocks. He added that the company is negotiating with the WSE about its market listing.
In January, the company set the IPO's minimum share price at zl. 21, with the final price to be set after the book-building process Jan. 15-18. However, Wojcik said he didn't rule out the shares commanding zl. 30 a piece.
"The company we represent is very young and has shown to the public that it has achieved success in a very short time," Wojcik said. He said that compared to its competitors, Interia has kept its operating costs down by hiring fewer staff and racking up high advertising sales. It has also managed to become the country's third-largest portal with more than 500,000 registered users since last February.
New trading opportunities
Market players are generally positive about IT companies launching on the WSE but for different reasons. The issuers themselves hope to raise money and increase their companies' value, while investors are eager for new securities to be included in their portfolios. Meanwhile, the WSE itself is desperate for new listings to boost trade and revive the somewhat flagging enthusiasm for the bourse among investors.
"The public debut of IT companies could indicate a landmark year for the Warsaw exchange," said Pawel Malyska, an analyst with BGZ Securities. He said players would be particularly interested in the IPOs of Interia and Arena, both in the top-five category in terms of services and number of hits by users.
But Malyska is also aware of the risks when trading in IT stocks. "Investors' approaches to IT companies tend to be emotional," he said. "But while the expectations attached to the IT sector are huge, so are the risks." He said the recent surge in share prices for new-economy companies on the Nasdaq showed that trading could still be volatile for IT stocks.
Analysts agreed that Internet fever should not overshadow the fundamentals the performance of the companies and their potential to generate profit. Some industry players remain wary about IT stocks.
"From what I have learned in the prospectuses, my approach to IT companies is cautious," said Witold Samborski, head of Fortis Securities. "I'm not convinced the companies offer a potential for growth." This sentiment is understandable given the dire financial performance of many IT companies.
For the first nine months of 2000, Interia.pl posted losses of zl. 6.8 million ($1.6 million), while for Hoga.pl losses amounted to zl. 1.2 million ($285,000). Getin, a company seeking to offer e-services in accounting and distribution to small and medium-size enterprises, closed the year with losses of zl. 2 million ($500,000). Piotr Kuba, the head of the investment division with Skarbiec Investment Fund, said analysts were well aware of problems within the IT sector. "It's not enough that a new sector emerges on the WSE," he said. "We will be closely following the quality of stocks on offer. The most relevant factors are profitability and the potential for growth."
But owners of IT firms are more optimistic that new-economy stocks will flourish on the WSE. "In the U.S., the Internet bubble was huge with stocks highly overvalued," said Tomasz Malec, director of Hoga.pl, which plans to launch on the WSE in the first half of the year. "In Poland this isn't the case, so I hope the situation on the Nasdaq will not have an adverse effect on the domestic IT sector."
Analysts agree that the WSE needs new companies to be a credible trading operation. "The Polish stock market needs fresh blood," Malyska said. "This means the inflow of new public companies with higher capitalization to meet the growing demands of investors."
Jacek Socha, president of the WSE, is also concerned about growing competition from abroad and the declining number of companies going public. "Trade has been hitting record highs, while the number of companies going public has been declining," he said at the new-year opening of the exchange. Kuba agreed, saying the WSE has found it difficult to meet the demands of institutional investors.
Bring on the old order
Given the potential shortcomings of new-economy stocks, not surprisingly players are hedging their bets and looking to old-economy companies for sound investments.
MCI Management, Poland's first listed venture capital firm, held its IPO in December and is looking to float 5.2 million shares to raise cash for new technology projects. Of these shares, 1.4 million were reserved for management stock options and the remaining 3.8 million were offered in four tranches, with 2.5 million for institutional investors and 1.3 million for individual investors.
The IPO was aimed mainly at institutional investors, among which MCI has a wider appeal with its transparent business model, effective company management, and the ability to offer a diversified investment portfolio, said Jaroslaw Sobkowiak, MCI's financial director.
At present, MCI is waiting for the WSE's decision about its exchange debut date, but Sobkowiak said he expected it to be scheduled in late January or Feb. 1. MCI expects to free float 6-10% of the company, he said, adding that the company has already received zl. 24.2 million ($5.9 million) from the public market.
MCI's management is not concerned about where the WSE will put its shares on the exchange, but is confident that the firm will be included in the continuously trading stocks in SiTech, Sobkowiak said. "But we know that our free float is small, and we don't have experience in trading shares," he added cautiously.
Meanwhile, a flotation by LOT Polish Airlines is also causing interest among industry players. "If the treasury decides to take LOT public, it would be very interesting," said Kuba of the Skarbiec fund. "We haven't had a company like that on the WSE." With LOT's soft landing on the WSE it will be the first transport company traded on the Warsaw floor. Fortis' Samborski was also bullish about LOT. "It will be a security to buy because of its capitalization and liquidity," he said.
However, brokers are also aware that companies such as LOT and MCI have the backing of major strategic investors, something that could affect the low trading volume and shrinking liquidity. The Swiss Air Group already holds 37% of LOT. Europejski Fundusz Leasingowy, a listed leasing company, plans to remain a major stakeholder in Getin holding with its 88% stake in the Internet company.
Nevertheless, companies listing on the WSE are a welcome sight to traders regardless of their shareholder makeup. The exchange has a market capitalization of zl. 130 billion ($31 billion) and institutional investors, particularly domestic pension funds, said recently they felt "cramped" on the Warsaw floor as demand for the funds exceeds supply. Already pension funds account for 2.6% of the WSE's capitalization, a figure that has doubled in the last six months.
"We need new listed companies," said Ewaryst Zagajewski, director of the investment office with PKO/Handlowy PTE pension fund. "Since the domestic pension funds got started, the demand on the capital market has been increasing dramatically."
"Big issuers are the most interesting for pension funds. But if the price is attractive, we could take into account even smaller companies."
Some companies such as the ITI media group and Eliza, a jewelry distributor, and even the treasury remain hesitant about going public. The treasury has been considering IPOs for five state-owned industries including the Belchatow energy conglomerate, nitrate fertilizer manufacturer Zaklady Azotowe w Pulawach (Z.A. Pulawy), insurer Powszechny Zaklad Ubezpieczen (PZU), LOT and Powszechna Kasa Oszczednosci Bank Polski (PKO BP), the state savings bank.
But analysts are particularly cautious about IPOs from companies such as PZU due to the recent dispute between its strategic investor Eureko and the Treasury Ministry and Z.A. Pulawy. The recent hikes in gas prices could seriously affect the company's performance as gas purchases account for up to 40% of total production costs. "The best time to privatize the Pulawy plant and the whole industry is over," said Marcin Sojka, an analyst with BGZ Securities. "But it is a big company and by the end of the day it might profit from being public."
This year could be a year of promise for the WSE compared to 2000, which saw only 12 IPOs. Last year, many companies froze plans to go public because of the highly volatile state of the market. Meanwhile, high trading volumes in the fourth quarter of 2000 and at the start of 2001 could attract more business for all players on the market the entrants, investors and the WSE itself.
