CEZ yesterday lost 2.4% (down further intra-day) in what seems like an overreaction to the latest in a series of admittedly bad news for the stock. Specifically, the Czech Senate’s rejection yesterday of a draft energy law, passed earlier in the year by the lower chamber. The rejection of the law in the Senate seems to have led to fears on the market that CEZ privatization could suffer should this crucial piece of power-sector legislation be derailed. While a delay would be unwelcome, we do not see the implications of the Senate’s veto as particularly damaging for the stock’s prospects.
First, the lower chamber needs only a simple majority to override the Senate’s (as well as a presidential) veto. Given that the original draft was passed by a comfortable majority, we expect that the lower chamber will marshal enough deputies to override the Senate veto. This could happen at one of the next sessions of the lower chamber, possibly in December, possibly in the first quarter of next year. Given that CEZ privatization will be at a very early stage then (choice of privatization adviser), we do not expect a delayed bill to interrupt the sale in any way.
Second, the most serious objections to the proposed law were focused on secondary issues, such as the government’s ability to block imports or exports of power and, it seems, did not concern the substance of the law, which deals mainly with the regulatory framework and introduction of competition on the Czech power market. Therefore, CEZ should not be harmed if some of the objections are accommodated and reflected into a new version of the law. Again, if Thursday’s fall of the stock was the market’s response to the veto, then it was largely an irrational and excessive response, in our view. We keep our buy recommendation.
(Ondřej Daťka)