INTERVIEW - Erste Picks Proprietatea Among Top Romanian Stock Tips for 2012, Sees No IPOs in Croatia, Serbia Over Mid Term

In terms of picks on the Croatian bourse, investors are most likely to reward companies with a net cash position and a stable balance sheet and cash flow, Henning Esskuchen told SeeNews in an emailed interview.

His watchlist for the Serbian equity market is topped by oil firm NIS and dairy company Imlek [BEL:IMLK].

In contrast to the empty medium-term Initial Public Offering (IPO) pipeline in both Serbia and Croatia, Romania is now in the limelight after the government there finally came up with a concrete plan to tap the equity market, Esskuchen said.

He is confident the listing of prominent names - such as Romanian restitution fund Proprietatea which went public in January, would certainly help regional exchanges ease their perpetual liquidity crunch. “Other than that they have to go the normal route of growing along with the process of developing from frontier to emerging to - finally - developed markets.”

Fondul Proprietatea, set up in 2005, was designed to compensate pre-communist owners whose property cannot be restored in its original form. The fund - which owns stakes in companies active in electricity generation, oil and gas production, power and gas distribution and transmission, is managed by U.S.-based Franklin Templeton Investments.

The expert also advocates harmonising trading systems and related regulations within the network of the regional stock exchanges as that could help overcome any technical resistance that clients may be struggling with.

Year-to-date (YTD), the bourses in Bucharest, Zagreb and Belgrade have performed more or less in line with other emerging markets. If there are any aspects of that performance that were slightly better, Esskuchen thinks it was due to a base effect. “These markets were not performing as strongly as others have before, so they did not have that much ground to lose.”

In terms of valuations, he believes the entire region is cheaper than other emerging markets although with a bit weaker growth if compared with places like China, for example. “Within the region, Romania and Serbia are clearly traded below historical averages. Croatia is not such a clear case and valuation alone does not make a strong argument for that market right now.”

PUBLIC OFFERINGS POISED TO RAISE BUCHAREST BOURSE PROFILE

Esskuchen noted that the plans of the Romanian government to raise cash from selling assets on the stock market remain in place even after the failure in July of the secondary public offering (SPO) of a 9.8% state-owned stake in oil and gas group OMV Petrom [BSE:SNP].

“The next SPO should be launched for a 15% stake in the national power transmission system operator Transelectrica [BSE:TEL] in the last quarter of 2011, while in the first half of 2012 the government intends to initiate the SPO for a 15% stake in the operator of the national gas transmission system Transgaz [BSE:TGN].”

In his view, the most important offering will be the IPO, worth about 300 million euro ($406 million), of a 15% stake in gas producer Romgaz which should take place in the first half of 2012. “It is not clear if the government’s intention is to resume in 2012 the offering procedures in the case of Petrom,” Esskuchen said.

After a very weak performance in terms of listing important state-owned companies on the Bucharest market, he thinks a few successful public offerings of government-owned equity stakes could help a lot to boost the market’s visibility.

“This would be supportive for the sentiment of foreign investors regarding the Bucharest market which is highly reliant on foreign capital flows considering the rather low strength of the domestic institutional investors with local pension and mutual funds holding less than 10% of the free float market capitalisation.”

None of the Romanian blue chips have performed much better than the market average in 2011, but Esskuchen notes a few mid-cap stocks - with market cap below 100 million euro, which were not synchronised with the general market trend.

"Fertiliser producer Azomures (+70% YTD) due to the boosting of its financial performance in FY2010 and FY2011; edible oil producer Argus (+124% YTD) due to the interest of two groups of investors to take over the company; chemical producer Oltchim (+450% YTD) due to privatisation plans. Crude oil transporter Conpet (+15% YTD) or aluminum producer Alro (+27% YTD) could be some notable examples in 2011 but with the same mention that the investability of these stocks is very low.”
 
Going forward, Esskuchen believes it would make sense to consider a consistent exposure to the Romanian market within a regional portfolio given that the most visible companies from the oil and gas sector - Petrom, utilities Transelectrica, Transgaz, and pharmaceuticals Antibiotice [BSE:ATB] and Biofarm [BSE:BIO], are traded at more than 20% discounts compared to their Central and East European (CEE) peers and that debt sustainability indicators are also, in general, more comfortable than in the case of the latter.

“Our preferred stock for 2012 is Fondul Proprietatea [FP] as this closed-end fund is the most visible company on the Bucharest market with over 6.0 million euro liquidity per trading session, more than half of the domestic market turnover.
FP is traded at an exaggerated discount (over 60%) to NAV [net asset value], which we believe will narrow to some 30% in maximum two years. This would result into an upside potential of at least 50%.

The stock drivers will be a gradual liberalisation of electricity and gas markets under pressure from the IMF and the EU; the outlook of listing in a maximum three years of the key unlisted companies from the FP portfolio - Romgaz in 2012, nuclear power producer Nuclearelectrica and hydro power producer Hidroelectrica; and the expertise of the fund manager Franklin Templeton.“ 

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