FED In The Spotlight

Information that got a lot of publicity on the markets was about FED decision, taken already after closing of Thursday trading session in Wall Street, about an increase of discount interest rate by 25 basis points up to 0.75 percent. At the same time (for the time being ?) the main interest rate was maintained at the level of 0.25 percent. It is a major event of the passing week and response of individual markets to it varied a great deal. Generally speaking it can be stated that (except for Friday quotations in Asia) there were no significant changes in stock exchange indices. Most probably the investors await further developments. Ben Barnanke speech planned in Congress on the nearest Wednesday and Thursday may be one of most material events, since all investors wait for disclosure of more complete data about economic situation in USA. This applies in particular to an option of further tightening of monetary policy by FED. Consequently the nearest trading sessions may by characterized by swinging moods to a great extent. Despite the aforementioned threats last week was moderately advantageous for stock holders. Two major Warsaw Stock Exchange indices, namely WIG and WIG 20, were up by 1.89 percent and 1.48 percent respectively.

The growth trend prevailing in the wide market had also positive impact on the quotations of foreign companies. Exceptions from this rule were the following securities whose price was falling last week: ACS (-3.67 percent), AST (-8.44 percent), ATL (-1.72 percent), BVD (-4.05 percent), EAT (-1.00 percent), OEG (-2.50 percent) and WXF (-0.37 percent).The relative weakness of these securities was due to both fundamental and market reasons. In the group of the latter reasons more and more significant role is played by liquidity. The poorest performance in terms of liquidity was recorded by Czech Pegas whose stock was not traded at all during last five trading sessions. Meanwhile OEG and BVD stocks were traded on last Monday and Tuesday respectively. Consequently it can be assumed that depreciation of their prices was driven to a large extent by low liquidity. BVD position to this extent may be additionally improved by a possible settlement with major creditors. As  part of turnaround plan Belvedere proposed them the swap of PLN 550 million debt into equity (bonds worth EUR 123.75 each) with an option of their further conversion into 5 new shares in BVD. If the above transaction has been accepted by most creditors then not only BVD financial performance will improve but also BVD stock liquidity. Meanwhile a competitor of Belvedere listed on the Warsaw Stock Exchange (nota bene suspected by Sobieski vodka producer’s governing bodies of a hostile take-over attempt), namely CEDC recorded an increase of its market value by 8.09 percent last week. Here stock price was boosted significantly primarily by a prospect of selling CEDC distribution network that accounts for 25 percent of revenues and 10 percent of net profit. The distribution network sales proceeds (approximately PLN 500 million) may reduce significantly liabilities of holding or possibly create an opportunity for its further market expansion, especially through acquisition of other business entities. The CEDC governing bodies are considering the sale of distribution operation to another business entity or its sale through a public offering on the Warsaw Stock Exchange (WSE).On the opposite ends were two other large operators from the food business, viz. Astarta and Kernel. Both companies have Ukrainian roots and were market leaders in the category of foreign companies in terms of weekly rate of return. However, AST stock price was down by 8.44 percent, whereas KER stock price was up by 13.70 percent.  Once of major reasons for significant Astarta stock price plunge is an option that investors might like to cash their profits. This is indicated by a daily AST graph that shows a risk of emergence of the double-top formation (sometimes called an ”M” formation).In this context the last package deal for 50 000 shares in AST, sold at the unit price of PLN 49.45 on 18 February this year starts to look alarming. Meanwhile Kernel stock price was moving in the opposite direction and the price of its shares last week was invariably going up, reaching new historical maximum at the level of PLN 52.30 on last Friday. More information on this Company can be found in the last part of this commentary. Last week another foreign company listed on the Warsaw Stock Exchange (WSE) with stock prices at the highest level in 52 weeks was Silvano. The buy and sell transactions of single shares during the last Monday trading session were made at PLN 5.15.Finally on this day at trading session closing stock price fell slightly to PLN 5.14, and 58 109 shares in SFG were sold, which was relatively high number in case of this company. On 5 March this year Extraordinary General Meeting of Shareholders of Silvano will be held that is supposed to make material changes in the composition of the Supervisory Board of this clothing company. Most probably Toomas Tool and Stephen Balkin holding 25 percent and 20 percent shareholding respectively in total number of votes at SFG will have the highest impact on the General Meeting proceedings. Strong appreciation of SFG stock price shows that the market expects a positive scenario. Cinema City International was another foreign company whose market capitalization was at a record-high level. The CCI stock was traded at PLN 37.25 on last Thursday. Meanwhile last week the market capitalization of the company was up by 3.93 percent. 

Market capitalization of most foreign developers listed on the Warsaw Stock Exchange (WSE) was up. Last week the leader to this extent was ORCO whose stock price was up by 10.32 percent, whereas previous week saw a 11.3 percent stock price appreciation. Most probably the market expects that the company will negotiate debt restructuring favourable for shareholders. At the opposite end there were ATL and WXF whose market capitalisation during  last 5 trading sessions fell by 1.72 percent and 0.37 percent respectively. 

Last week MOL stock price was slightly up (0.98 percent). The holding published data reflecting its financial performance in the October-December period i.e. Q42009.A Hungarian concern posted a net loss of HUF 4.8 billion, compared to a net loss of HUF 37.1 billion in the same period of 2008. The analysis of financial report on the last quarter of 2009 immediately discloses that fuel holding continues to generate a loss in the refinery and distribution legs of its business. In much better shape is its oil extraction business, which is profitable. Apart from the last financial statement it seems that quite material for the future of Hungarian company is the attitude of Russian concern Surgunieftiegaz that holds approximately 21 percent shareholding in MOL. According to „Nepszabadsag” newspaper this significant shareholder is talking to Kirill Kasatkin who has ties with Emfesz owners. Thus, it cannot be ruled out that relatively strong performance of MOL stock indicate an option of conflict with Russian shareholders coming to an end. Quite significant factor are also persisting relatively high prices of crude oil. Last week an oil barrel again tested level of US $ 80. An improvement of economic situation in the raw material market strengthened also market prices of two Czech captains of industry. Last week CEZ and NWR stock prices were up by 2.86 percent and 1,14 percent respectively. Among the remaining foreign companies Unicredit stock continued to be also on a winning streak and its price was up by 4.16 percent. 

Leader Strengthens Its Position

Kernel is closer and closer to taking over control over Allseeds that also in its core business has vegetable oil extraction facilities and grain elevator as well as a terminal at Nikolajevo with annual handling capacity of 500 000 tonnes. The merger of these two companies will create a new business entity with a share in Ukrainian vegetable oil exports of approximately 50 percent. According to a ball-park estimates of the holding listed on the Warsaw bourse the closing of Allseeds take-over deal will boost (effective from 2010) EBITDA by approximately US $ 45 million. According to preliminary estimates the deal will cost around US $ 230 million and may be adjusted depending on the outcome of audited financial performance of the target company that is to be published on 31 March this year. A bit earlier i.e. in the nearest 2-3 weeks the Ukrainian Anti-monopoly Authority should take a decision on this M&A transaction, one of the largest on the Ukrainian market. With regard to preliminary (unaudited) results of Kernel Group generally speaking the shareholders have no grounds to be concerned. In October-December 2009 the consolidated revenues of Ukrainian company totalled US $ 272.27 million (PLN 769.79 million), compared to US $ 291.20 million (PLN 833.65 million) in the same period of the previous year. Meanwhile net profit in the quarter ended on 31 December 2009 was slightly up to US $ 43.17 million (PLN 122.05 million) compared to US $ 39.90 million (PLN 114.22 million) generated in the last three months of 2008. As at 31 December 2009 Kernel Group had cash assets amounting to US $ 50.5 million, which is material because Allseeds take-over is supposed to be financed with debt. Thus macroeconomic downturn did not have negative impact on company financial performance. Kernel has taken an advantage of an opportunity in the domestic market and decided to take over Allseeds. Long-term prospects of the company after deal closing are advantageous. Meanwhile in short-term the KER shareholders should consider possible additional costs of Allseeds restructuring.

Independent analyst
Rafał Salwa