STOCKWATCH - Austria's Erste Lowers Recommendation for Croatian Oil/Gas Firm INA to "Reduce" from "Accumulate"

"Our DCF [Discounted Cash Flow] valuation suggests a 12-month target price of 2,550 kuna ($528/358 euro) per share and given the share price of 2,810/share, we downgraded our recommendation to Reduce from Accumulate," Erste’s energy sector analyst Jakub Zidon said in a note to investors released on Wednesday afternoon. 

INA’s shares were traded at 2,777 kuna by 1057 GMT on the Zagreb bourse on Thursday, fractionally up from their 2,775 kuna close on Wednesday.

The biggest issue for INA’s share price still remains its potential takeover, Zidon added.

Hungarian peer MOL, which owns 25% stake of INA, has made a public bid to buy the 30.16% free-float of the Croatian company at a price of 2,800 kuna per share. So far the bid has left the shareholders mostly indifferent with MOL getting its hands on only 19,304 of the more than three million shares it was targeting. However, market expectations for a counterbid or a sweetened MOL offer faded earlier this week. The deadline for shareholders to accept the MOL bid is October 3.

The Croatian government owns 44 percent of INA and wants to keep a 25% stake until Croatia's entry into the European Union, which is expected around 2012. After its public bid expires, MOL and the cabinet in Zagreb would resume talks on a possible swap of shares between the two companies.

INA explores and drills for oil and gas in Croatia, Angola, Egypt, Syria and Iran. It owns two refineries in Croatia and runs the biggest domestic fuel retail chain. Despite recent record high oil prices on world markets, its profitability has been seriously hurt due to semi-regulated prices for gas and petrol products in the Croatian market. In addition, INA should complete in the next three years a $1.1 billion upgrade of refineries to enable them to make oil products meeting the quality standards of the European Union.

"INA is still suffering from price caps in both the retail and upstream segments. As Croatia is approaching EU membership, we think these 'brakes' will be removed, but it will take some time," Zidon sad. Erste expects the fuel price cap, whose annual negative effect amounted to 130 million kuna for both the refinery and retail segments, to end in 2009, while natural gas prices should converge with import prices just before EU entry, most likely in 2012.

(1 euro = 7.1155 Croatian kuna)