The markets are visibly in assets re-rating mode, reflecting risks hidden in the current macroeconomic environment. Concerns about US growth prospects coupled with lingering eurozone fiscal turmoil continue to maul investors’ sentiment. For the time being we are unable to see any fresh catalysts that might favour the markets’ short-term growth: eurozone GDP has started to disappoint while French and German politicians are considering a Tobin tax, which if introduced could severely hit the earnings of European exchange operators. We have revised our net earnings estimates for GPW down by 7.7% to PLN 113.5m (up 19.8% y/y) for 2011, 12.6% to PLN 126.0m (up 11.1% y/y) for 2012 and 13.2% to PLN 139.8m (up 10.9% y/y) for 2013. Our fair value estimate has fallen 18.7% to PLN 45.0 per share, which implies 5.4% upside. We downgrade our rating to Hold.
Investors flee equity markets: According to EPFR data, equity funds had more money pulled out of them last week than at any time since early 2008, with a simultaneous US$ 49.2bn of inflows recorded by money markets as investors struggled to find safe haven plays. The scale of the movement is really extraordinary and the markets appear to be bracing for the worst-case scenario of a double-dip and another recession. Although we are still far from factoring in such a scenario, we err on the side of caution and advise against increasing investments in exchange operators.
Transaction tax on the drawing board:
This week, French and German politicians proposed introducing a tax on financial transactions. Berlin and EU Commission made it clear on Wednesday and Thursday that a proposed tax on financial transactions would have to apply to the entire European Union. Any EU-wide measure requires agreement from all 27 members, which is hard to imagine for the time being. Even so, the announcement was enough to cripple sentiment due to concerns the tax could slaughter trading volumes (and thus the earnings of exchange operators) and push market activity outside the EU.
2Q11 results on 30 August:
The Warsaw Stock Exchange (GPW) is scheduled to report its 2Q11 results on Tuesday 30 August 2011. We expect net income at PLN 33.0m (up 18.6% y/y, down 14.5% q/q) for 2Q11. We expect the quarterly decrease to have been triggered by an overall 4.2% q/q decline in equity trading and a 9% q/q hike in operational costs in the period, with the latter driven by higher personnel costs and external service costs.
GPW’s stock price has fallen 12% in the past month, outperforming the WIG20 by 5% and MSCI Poland by 3%. On a 2012F P/E of 14.2x, GPW currently trades at an 27.6% premium to peers. We see the premium as unjustified, especially as we do not know what shape the potential transaction tax might have. Although the Tobin tax is still a long way from being introduced, we recognize it as an important issue and a perennial downside risk for GPW’s share price performance in the months ahead.