Strong expected EPS growth and declining risks related to the bank’s asset portfolio favor KB stock. However, after the recent stock-price gains, which in part reflect the high expectations related to KB’s future performance, the stock now trades with only a 6% growth potential to our revised 6-12M target price of CZK 1,980. We therefore downgrade our key long-term recommendation from buy to hold; we also downgrade our short-term recommendation from buy to reduce, as a temporary correction is likely.
* Komercni banka will show, in our opinion, an attractive profit growth in 2002 and 2003 despite undertaking a large restructuring process. It will significantly outperform other Czech blue chips in terms of EPS growth. Moreover, conservative provisioning after the takeover of KB by Societe Generale and its new business strategy contribute to reduction of the risks related to the KB’s asset portfolio.
* KB’s new strategy, if successfully implemented, will be favorable to the bank and its stock as the planned increase in mass-market exposure, in addition to its good standing in the large-corporation sector, will help to diversify the bank’s operation and the risks inherent in focusing predominantly on a single market sector.
* We have significantly raised our KB-share target price for end-2002 to CZK 1,980 (up from CZK 1,360), after: (i) considering the bank’s new strategy, (ii) reviewing our forecasts given the release of full-year 2001 and Q1 2002 results, and (iii) using more elaborate valuation methodology.
* However, since KB stock currently trades with only a 6% upside potential to our new target price (CZK 1,980), we downgrade our key long-term recommendation from buy to hold. Investors should begin to buy the stock again if it drops below the CZK 1,750 level.
* The stock has gained 48% in the past three months as the market has, in our opinion, factored (at least partially) KB’s aggressive targets into its expectation. Since the bank has not disclosed any targets for 2002 and 2003, KB’s interim results, which might be significantly below the 2004 targets, may lead some investors to take their hitherto profits.
* Moreover, the current fresh money flow is expected to weaken after the funds from selling Ceska sporitelna stocks in the recently concluded tender offer are switched over to other stocks (including KB). KB stock has thus in a short term, we believe, more downside than upside potential. We thus downgrade our short-term recommendation from buy to reduce.
(Jan Hajek)