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Komercni banka after privatization

28.6.2001 16:04
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Czech Cabinet approved early in the morning the choice of Societe Generale as the KB tender winner. SG's bid for the 60% stake in KB was CZK 40 bil., and the government said that no further guarantees were provided (on top of the CZK 20 bil. guarantee approved by the Cabinet in December 2000). Although the announced price (which amounts to some CZK 1,750 per share) is at the top of the range expected by the government, the initial positive market response was rather mild (today's high was CZK 1,155 per share, some 4.2% above yesterday's close). In fact, profit taking began later to dominate, and the stock is now 4.3% down from yesterday's close, and trades at fairly large 40% discount to the price SG will pay.

The selling pressure seen today reveals the extent to which many investors already hold significant long positions in KB stock and now wish to take profits. In this sense, the positive announcement today thus far appears to have opened the final, profit-taking stage of a privatization investment play rather than providing a signal for a fresh rally. Nonetheless, the outlook for the next coming days is largely unpredictable, and the volatility may continue. Going beyond the short term, and following the unexpected stock weakness, we believe that there is a reasonable positive case for KB over a 6-12 months' horizon. In light of our updated KB forecasts (2001 and 2002 net profit of CZK 2.4 bil. and CZK 5.4 bil., respectively), the stock may be expensive in terms of this year's book-value multiple (2001E PBV of 1.78x at CZK 1,060), but does provide some growth potential on the basis of its 2002 expected performance.

At price CZK 1,060 per share, KB's 2002E PBV stands at 1.44x. Given our forecast of 21% ROE in 2002, we would consider KB fairly priced at some CZK 1.60-1.65x PBV in 2002 (we are rather optimistic on KB' operating turnaround and on its expected performance, but at the same time we apply a rather high cost of equity to reflect KB's higher-risk profile in terms of the balance sheet structure, management's attitude to risk and the stock's beta, e.g. relative to Ceska sporitelna). This target multiple range and our latest 2002E BVPS forecast of CZK 736 imply a price range of CZK 1,178 -1,214 per share, which in turn implies some 11-15% growth potential over the next 6-12 months from the current price of CZK 1,060.

The conclusion is that the somewhat surprising mild response to the privatization news and the subsequent profit-taking may have ironically opened way for a new investment play in KB's stock. Once the dust settles and enough profits have been realized, KB will be well worth looking at. The long-term upside potential of some 11-15% may not be a particularly powerful selling point, but still seems like a reasonable deal in the context of the Czech market. With the telecom sector stocks' outlook still uncertain, and with CEZ's Temelin troubles likely to continue for a few more months, the restructuring Czech banking sector (i.e. KB and CS) will be the right place to be, in our opinion. The next scheduled KB corporate event is the release of 6M IAS results in the second half of July. KB management is likely to use this opportunity to provide a 2001 performance outlook.

(Ondřej Daťka)

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