KB completed its audit on Monday

Vavra said that government guarantees could total CZK 20-30 bil., which is a rather large figure (previously, he had suggested the figure CZK 20 bil., though the bank later distanced itself from the projection). However, his projection of the amount of guarantees still does not provide any information on how KB will actually benefit, since one does not know the quality and status (in terms of classification) of the receivables at the time of the guarantees.

Perhaps more important for the stock’s near-term outlook is that, based on the due diligence results, Vavra reiterated a forecast of a CZK 1 bil. bottom-line loss this year (in line with our projection) and predicted zero profit for next year (significantly worse than our forecast of CZK 4 bil.), and - this is crucial – these figures are after the guarantees are taken into account. This would imply that the post-guarantee, post-privatization equity of KB would be some CZK 19 bil., compared to our forecast of CZK 23 bil., with negative implications for a book-value-based valuation. The CEO’s projections may be disappointing for that part of the market that expected that the government’s generous help would provide a major boost to KB’s equity. We are disappointed too: although we have been rather pessimistic concerning the beneficial impact of guarantees, we have been more optimistic on KB’s net income and equity in 2001, and a zero profit next year would be a poor bottom-line result.

The market’s short-term response will depend on whether it will look at the nice-looking CZK 20-30 bil. volume of guarantees suggested by the CEO, or whether it will note the fairly poor post-guarantee projections for 2001. We feel that the latter is more important and consider the latest news as a short-term negative for the stock.

(Ondřej Daťka)