Macroeconomics Monthly Reporti.wp.pl/a/dibre/rmiesieczne/august2007.pdfStrong commodity prices and a...

BRE Bank Securities

1 August 2007

Monthly Report BRE Bank Securities BRE Bank Securities

Periodic Report

Monthly Report August 2007

Equity market Strong commodity prices and a weak yen show that we are dealing with a correction rather than a trend reversal. The extent of the correction is hard to predict. Some of the small and mid caps have been losing steam for a few months now, and we see this as a good opportunity to add mid-cap stocks to portfolios, with emphasis on builders and retailers. Banks. The WIG-Banki Index shed 1% since our July Report. The biggest losers were banks not included in the WIG20 index (Kredyt Bank -15%, ING BSK -10%, Bank Handlowy -8%, Millennium -6.5%), while WIG20 banks took a smaller dip of 1.7% on average. During the same period, the WIG and WIG20 indexes fell a sharper 4.9% and 2.8% respectively. We continue to favor WIG20 banks, but advise investors to take profits on their positions in PKO BP. Among small caps, our favorite pick is Kredyt Bank, whose decline in the past month had no basis in fundamentals. Gas&Oil. Rallying crude oil prices have shrunk refinery margins, creating a tough environment for refineries. Our recommendation for Lotos is to take advantage of any rally on strong FQ2 earnings to REDUCE positions. As for PKN Orlen, it remains an attractive investment at the current price level. Telecommunications. As entry barriers come down thanks to the UKE’s regulatory activity and new technology, margins in the telecom sector are bound to erode faster, hurting both TPSA and Netia. The impact of the increased competition will become noticeable in the third-quarter earnings. We are reiterating a negative outlook on the telecom sector. Media. A heated economy and consumption growth should drive advertising budgets. The media industry will benefit from early parliamentary elections, if called. Media stocks are a defensive play in a bearish market. We advise to overweight Agora and underweight TVN. IT. Technology companies were still waiting for the long-overdue public-sector orders in July. Recently, the Interior Ministry finally promised sixteen tenders with a total value of PLN 2 billion for the third and fourth quarters. Construction. Construction output has slowed down, affecting sentiment to the building sector. Investors will have to revise expectations as the second-quarter earnings season approaches. Polimex has become an attractive investment pick after a resent downslide. We expect Elektrobudowa’s FQ2 earnings to surprise on the upside. Pharmaceuticals. We do not expect any major reversal in sentiment on the second-quarter earnings reports of pharmaceutical wholesalers. We have a neutral view on the sector as a defensive alternative in case of a deeper correction. Retail. We are looking forward to the second-quarter earnings announcement of Emperia, which we expect to post additional real-estate gains. As for Eurocash, we are reiterating a SELL rating. Rating changes. As of the date of this Monthly Report, we are upgrading our investment ratings on Emperia (Hold), Bank Handlowy (Hold), ING BSK (Hold), and Koelner (Reduce), and downgrading KGHM (Hold), Lotos (Reduce), PKO BP (Reduce). Our rating on PGF is under revision.

BRE Bank Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final pages of this report.

Analysts:

Marta Jeżewska (+48 22) 697 47 37 marta.jeż[email protected]

Michał Marczak (+48 22) 697 47 38 [email protected]

Krzysztof Radojewski (+48 22) 697 47 01 [email protected]

Kamil Kliszcz (+48 22) 697 47 06 [email protected] Piotr Janik (+48 22) 697 47 40 [email protected] Kacper Żak (+48 22) 697 47 41 [email protected]

Macroeconomic Analyst Janusz Jankowiak

1 August 2007

WIG vs. indices in the region

BRE Bank Securities

Equity Market Macroeconomics

Avg daily trading volume

Average 2008 P/E

Average 2007 P/E

WIG 63 670 19.9

16.9

PLN 1 915m

35000

40000

45000

50000

55000

60000

65000

70000

06-07-12 06-11-07 07-03-05 07-07-01

pkt

WIG BUX PX50

pts

BRE Bank Securities

1 August 2007 2

Monthly Report BRE Bank Securities

Table of Contents 1. Equity market ........................................................................................ 3 2. Fund flows ............................................................................................. ..5 3. Current recommendations of BRE Bank Securities S.A. ....................... 6 4. Recommendation statistics ................................................................... 7 5. Macroeconomics ................................................................................... 8 6. Financial Sector ..................................................................................... 9

6.1. BPH ............................................................................................ 14 6.2. BZ WBK ...................................................................................... 15 6.3. Handlowy .................................................................................... 16 6.4. ING BSK ..................................................................................... 17 6.5. Kredyt Bank ................................................................................ 18 6.6. Millennium .................................................................................. 19 6.7. Pekao .......................................................................................... 20 6.8. PKO BP ...................................................................................... 22

7. Gas & Oil, Chemicals .............................................................................. 24 7.1. Lotos ........................................................................................... 25 7.2. PGNiG ........................................................................................ 26 7.3. PKN Orlen .................................................................................. 27 7.4. ZA Puławy .................................................................................. 28

8. Telecommunications .............................................................................. 29 8.1. Netia ........................................................................................... 31 8.2. TP SA ......................................................................................... 32 9. Media ..................................................................................................... 34 9.1. Agora .......................................................................................... 35 9.2. WSiP ........................................................................................... 36 10. IT Sector ................................................................................................ 37 10.1. ABG Spin .................................................................................. 38 10.2. Asseco Poland .......................................................................... 39 10.3. ComArch ................................................................................... 40 10.4. Macrologic ................................................................................ 41 10.5. Prokom Software ...................................................................... 42 10.6. Sygnity ...................................................................................... 43 10.7. Techmex ................................................................................... 44 11. Metals .................................................................................................... 45 11.1. Kęty ........................................................................................... 46 11.2. KGHM ........................................................................................ 47 11.3. Koelner ...................................................................................... 48 12. Construction .......................................................................................... 49 12.1. Budimex ..................................................................................... 50 12.2. Elektrobudowa ........................................................................... 51 12.3. Erbud ......................................................................................... 52 12.4. Hydrobudowa Śląsk ................................................................... 53 12.5. Polimex Mostostal ...................................................................... 54 12.6. Rafako ....................................................................................... 55 12.7. Ulma Construccion Polska ......................................................... 56 13. Pharmaceutical Manufacturers and Distributors .................................... 57 13.1. Farmacol .................................................................................... 57 13.2. PGF ........................................................................................... 58 13.3. Prosper ...................................................................................... 59 13.4. Torfarm ...................................................................................... 60 14. Retail\Wholesale .................................................................................... 61 14.1. Emperia Holding ........................................................................ 61 14.2. Eurocash ................................................................................... 62 15. Others .................................................................................................... 63 15.1. Kogeneracja .............................................................................. 63 15.2. Mondi ......................................................................................... 64

BRE Bank Securities

1 August 2007 3


Equity market

S&P500, DAX P/E chart

0

10

20

30

40

50

60

70

1998-11-30 2000-07-31 2002-03-29 2003-11-28 2005-07-29 2007-03-30

punktówP/E

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

P/E

Index

0

10

20

30

40

50

60

70

1987-07-31 1992-02-28 1996-09-30 2001-04-30 2005-11-30

punktówP/E

0

200

400

600

800

1000

1200

1400

1600

1800

P/E

Index

Source: Bloomberg

pts pts

Equity market Our predictions for July came to fruition, with US 10Y note yields down, and investors worrying not about inflation, but mostly about weaker economic growth in the EU and the USA (weak macro data). The global economy is doing great, as indicated by the latest IMF data. In Poland, commodity stocks rallied, outperforming banks, telecoms, and real-estate developers. At the same time, the WIG20 stocks delivered better returns than small and mid cap indexes where some components have shed up to 50% since the May peak. It seems that the correction in global equity markets that we had anticipated for late August/early September started faster than expected. As for the question whether it is really a correction or in fact a trend reversal, the answer can be found in commodities and currency markets, and specifically in the behavior of the yen. In our view, strong commodities and a weak yen show that investors do not fear a global recession, but rather that we are dealing with a correction in the recent market gains. The duration and depth of this correction are hard to predict. Given that some of the small and mid caps have been on a downslide for the past few months, we would use the downtrend to buy, in particular building and retail stocks whose prices are slowly coming down to attractive levels. We do not think that foreign markets will go into a slump. A correction is by all means in order in light of the recent rallying. Neither the DAX, nor the S&P, are overvalued yet: their current P/Es are a mere 14.5, and 17.7 respectively. Equities are "safe" until economies slip into recession, dragging down corporate earnings like in 2001. This is an unlikely scenario for now, but one that the market is “playing out.” The pace of the global economy is faster than expected, propelled by such countries as China, Brazil, and India, while US’s contribution to the global GDP is decreasing. Macroeconomists say that the USA’s GDP growth rate recorded in the second quarter (3.4%) will not be sustained in the second half of the year, but, even if it should fall to 2%, the world will not suffer much (GDP growth at over 5%), except for some temporary turbulence in equity markets.

Unfortunately, we were right in predicting a deterioration in economic indicators which, at least in the near term, are bound to keep investors on edge as sentiment in international markets dwindles. Labor productivity and salary growth data are the lowest points of the economic picture. Output per worker increased by 8.6% y/y in April, 4.5% in May, and a meager 2% in June. During that period, salaries rose by 8.2%, 8.9%, and 9.4% respectively. After a 0.25ppt hike in June, Poland’s Monetary Policy Council decided to put further tightening on hold until August, based on a complete second-quarter earnings picture. We still think that we can expect two more hikes this year. Without them, according to the latest NBP projections, the inflation rate will fall within the range of 2.3 – 3.3 percent (compared to 1.3 – 2.6% in the April projections). In 2008, price growth is expected to range from 2.1% to 4.1% (vs. April’s forecast of 1.6% to 3.8%). In our opinion, these projections and the expected policy tightening pose no threats to the equity market as long as sentiment stays bullish on the outside. One example of this is Hungary, where the reference rate was upped from 6% to 8% over the past 1.5 years, while the Budapest stock index soared over 100%. However, in this case, negative inflation data, or, more specifically, concerns that inflation will speed up, will coincide with a correction in international markets spurred by GDP and future earnings fears.

S&P500, DAX P/E chart

0

10

20

30

40

50

60

70

1998-11-30 2000-07-31 2002-03-29 2003-11-28 2005-07-29 2007-03-30

punktówP/E

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

P/E

Index

0

10

20

30

40

50

60

70

1987-07-31 1992-02-28 1996-09-30 2001-04-30 2005-11-30

punktówP/E

0

200

400

600

800

1000

1200

1400

1600

1800

P/E

Index

Source: Bloomberg

pts pts

BRE Bank Securities

1 August 2007 4


A deeper downslide (10-20%) in equities in the summer season will influence the market’s performance in the fall. Previously, we predicted a “good summer and a not-so-good fall.” If individual investors catch on the idea that the current correction is a good time to buy investment fund shares, and investment fund company (TFI) traders are going to make sure they do (with the prerequisite that the correction cannot last longer than 2-3 months, and that the outlook must stay bullish, supported by growing salaries), and a price downslide and inflow of new funds from the ZUS results in a reduction in the equity component of open pension funds (OFE) from 38.3% in June to ca. 36% (the WIG index down to 60,000pts (-9%), PLN 1200m in inflows), the IPOs slated for October and November will stop being a risk factor, the more so that the price slump might cause them to be moved back. Looking how commodity stocks outperformed the broad indexes, in the near term, we expect that investor concerns over a slowdown in leading world economies could lead to profit-taking both in equity, and commodity markets. If LME prices resist the equity trends, they will prove the market’s strength and confirm that the current price decline is merely a correction (the more liquid commodity markets should be more sensitive to global economic growth), and a good opportunity to buy KGHM. As for banks, we expect that sentiment will remain subdued in the near term. Granted, the second quarter is shaping up to be a record earnings season for banks, but the next quarter might not be as robust. The industry’s sentiment indicator PENGAB was down for the third month in a row, for the first time because bankers feel more pessimistic about the current situation than the future. This does not mean that profits are about to go into a downward spiral, but rather that the expectations priced in bank stocks will likely not be fulfilled. Switching to building stocks, we predict a continued negative sentiment in the near term. Investors are looking forward to the second-quarter earnings results (which will be less than stellar), and the monthly data on construction output growth which has been slowing down pace. There are two reasons for this slowdown: First, the eagerly awaited large EU-funded infrastructure projects are nowhere in sight as yet, but this might change with the new building laws expected to be passed in the fall. The second reason is a shortage of materials which caused an enormous price hikes in the first half of the year. The situation is now slowly going back to normal thanks to increased imports and capacity expansions. We believe that the building industry has some good years ahead of it, with the players picked to carry out the EU-funded projects reaping the big benefits. The funds earmarked for those projects (next year at double the size of this year’s allocations) will keep project backlogs full even if the economy goes into a slowdown. Furthermore, profit margins will expand due to limited capacity. We would take advantage of the current pullback prices to take positions in selected building stocks. We are thrilled about the upcoming amendments in Polish real-estate development regulations. The proposed constraints and quality requirements will give an edge to developers with a stronger capital base, including those listed on the WSE. We recommend to take positions in stocks like GTC, Echo, and Dom Development, on the current weakness. Technology companies continue to wait for public sector orders. After a long deadlock, some of them are preparing for several large contract tenders that the government promised for the third and fourth quarters. In the meantime, IT stocks should perform better than the broad market, unless there is an early parliamentary election (a scenario which we do not ponder on here), in which case contract awards will be postponed by at least another six months. If the PiS party dissolves the ruling coalition, and the President calls an early election, our advice is to bail out of technology stocks first. We expect good performance from media stocks relative to other sectors. A heated economy and consumption growth should drive advertising budgets. In a bearish market, media should be considered a defensive sector. Contrary to their implications for the IT industry, the media industry stands to benefit from early parliamentary elections: an election campaign could put an extra PLN 50-70m in its pocket.

BRE Bank Securities

1 August 2007 5


TFI Inflows to investment funds set a new record in June, totaling PLN 5.2 billion. June was also an exceptional month in that, for the first time, the value of assets under management of in-vestment fund companies (TFIs) was larger than the AUM of open pension funds (OFEs). For another month in a row, stock market momentum encouraged larger allocations to equity funds (which recorded net inflows of PLN 3.9bn). “Other” funds also enjoyed tremendous popularity, with debt and money market funds surrendering some of theirs (both recorded net outflows of PLN 290m and PLN 500m respectively). We do not expect a complete reversal in these trends in the next few months. Money market funds, whose performance is more closely correlated with the NBP bill yields, will perform better as interest rates increase.

Fund Flows

TFI inflows/outflows by “equity component” funds and money market/debt funds

Source: Analizy Online

Emerging market funds July was a good month for emerging market funds, with the biggest inflows recorded by inter-national funds ($4.6bn), and Asia ($6bn). Latin America garnered $1.7bn, and EMEA funds saw $0.8bn in inflows.

GEM

-3 000-2 500

-2 000-1 500-1 000

-5000

500

1 0001 500

4-01

4-03

4-05

4-07

4-09

4-11

4-01

4-03

4-05

4-07

mln USD EMEA

-2 000

-1 500

-1 000

-500

0

500

1 000

4-01

4-03

4-05

4-07

4-09

4-11

4-01

4-03

4-05

4-07

mln USD

Source: EmergingPortfolio.com

Weekly inflows/outflows for selected emerging market funds

-2 000

-1 000

0

1 000

2 000

3 000

4 000

5 000

6 000

2006-05-01 2006-08-01 2006-11-01 2007-02-01 2007-05-01

PLN m

Equity, grow th, balanced fundsDebt, money market, other funds

$ millions $ millions

BRE Bank Securities

1 August 2007 6


Current ratings of BRE Bank Securities S.A.

Security Rating Target Price Date Issued

ABG SPIN Hold 7,87 2007-01-08 AGORA Accumulate 47,60 2007-07-05 ASSECO POLAND under revision 2007-05-11 BPH Accumulate 1079,00 2007-05-31 BUDIMEX Hold 121,70 2007-05-29 BZWBK Hold 284,10 2007-07-05 COMARCH Reduce 185,80 2007-02-05 ELEKTROBUDOWA Hold 221,50 2007-05-29 EMPERIA HOLDING Hold 134,17 2007-08-01 ERBUD Accumulate 100,00 2007-07-05 EUROCASH Sell 7,38 2007-02-05 FARMACOL Accumulate 62,90 2007-06-25 HANDLOWY Hold 109,00 2007-08-01 HYDROBUDOWA ŚLĄSK Hold 209,00 2007-05-29 ING BSK Hold 953,50 2007-08-01 KĘTY Reduce 187,50 2007-07-27 KGHM Hold 119,00 2007-08-01 KOELNER Reduce 53,72 2007-08-01 KOGENERACJA under revision 2007-06-06 KREDYT BANK Accumulate 26,76 2007-07-25 LOTOS Reduce 45,80 2007-08-01 MACROLOGIC Buy 58,43 2007-02-13 MILLENNIUM Reduce 12,00 2007-07-30 MONDI Reduce 80,00 2006-12-05 NETIA Sell 3,80 2006-09-06 PEKAO Hold 269,00 2007-06-06 PGF under revision 2007-08-01 PGNiG Suspended 2007-02-05 PKN ORLEN Accumulate 61,00 2007-07-02 PKO BP Reduce 54,44 2007-08-01 POLIMEX MOSTOSTAL Accumulate 297,70 2007-05-29 PROKOM SOFTWARE Hold 150,30 2007-02-05 PROSPER Hold 27,00 2007-06-25 RAFAKO Reduce 11,40 2007-05-29 SYGNITY under revision 2007-06-06 TECHMEX under revision 2007-03-07 TELEKOMUNIKACJA POLSKA Reduce 20,20 2007-07-05 TORFARM Hold 95,3 2007-06-25 ULMA CONSTRUCCION POLSKA Hold 320,8 2007-07-26 WSiP Buy 18,1 2007-07-13 ZA PUŁAWY Hold 112,27 2007-07-26

BRE Bank Securities

1 August 2007 7


Ratings issued in the past month

Ratings Statistics

All Issuers who are clients of BRE Bank Securities

Statistics Sell Reduce Hold Accumulate Buy Sell Reduce Hold Accumulate Buy

count 2 9 15 6 2 0 3 5 2 0 % of total 5.9% 26.5% 44.1% 17.6% 5.9% 0.0% 30.0% 50.0% 20.0% 0.0%

Security Rating Old Target Price Date Issued

AGORA Accumulate Hold 47.60 2007-07-05

BZWBK Hold Reduce 284.10 2007-07-05

ERBUD Accumulate Hold 100.00 2007-07-05

HANDLOWY Reduce Sell 109.00 2007-07-05

KĘTY Reduce Reduce 187.50 2007-07-27

KGHM Accumulate Hold 119.00 2007-07-03

KREDYT BANK Accumulate Hold 26.76 2007-07-25

MILLENNIUM Reduce Sell 12.00 2007-07-30

PKN ORLEN Accumulate Buy 61.00 2007-07-02

TELEKOMUNIKACJA POLSKA Reduce Hold 20.20 2007-07-05

ULMA CONSTRUCCION POLSKA Hold Hold 320.80 2007-07-26

WSiP Buy 18.10 2007-07-13

ZA PUŁAWY Hold Hold 112.27 2007-07-26

Ratings changed as of Monthly Report date

Security Rating Old Target Price Date Issued

EMPERIA HOLDING Hold Reduce 134.17 2007-08-01

HANDLOWY Hold Reduce 109.00 2007-08-01

PGF Under revision Reduce - 2007-08-01

PKO BP Reduce Hold 54.44 2007-08-01

KOELNER Reduce Sell 53.72 2007-08-01

LOTOS Reduce Hold 45.80 2007-08-01

ING BSK Hold Reduce 953.50 2007-08-01

KGHM Hold Accumulate 119.00 2007-08-01

BRE Bank Securities

1 August 2007 8


As expected, the beginning of the third quarter was marked by a continued strong zloty. Tem-porary escalation in political risk after Andrzej Lepper was thrown our of the government, like other zloty-depreciating events in the past, propelled an inflow of currencies sold by exporters, which protected the zloty from a sharp downturn. The zloty got additional support from the Monetary Policy Council’s rate hike in June. The market anticipates a further 100 bps hike in the next 12 months. As the dollar again depreciates against the euro, it is reasonable to anticipate that the zloty will strengthen relative to the dollar in the third quarter (to a little below 2.70). At the same time, the zloty will stay below 3.80 against the euro. If expectations of rate hikes to 5% by the Mone-tary Policy Council by the end of the year are maintained, and the ECB stops tightening at 4.00% until the fall, the zloty/euro exchange rate might temporarily fall as low as 3.70. An even sharper appreciation will be prevented by the growing risk of early elections in the fall. For the third consecutive month, construction output growth was below expectations in June (5.6% y/y; adjusted growth was 8.0%, manufacturing production was down 6.2% y/y). While, in the first quarter, manufacturing output was up 13.2% on a year earlier, the second quarter witnessed a slowdown to 8.8%. Long-term growth at a rate of 8% is consistent with the GDP’s growth rate of 5%. As production decelerated and employment and salaries soared, the unit cost of labor increased by 8.3% in June compared to 4.3% the month before. An acceleration in the ULC brings about reduced competition. There is no doubt that the Polish economy is slowly losing momentum as it stumbles against a supply barrier. A budget surplus was again reported in June, with PLN 600m in the black instead of the pro-jected deficit of PLN 955m. As a result, realized government deficit fell from 14.2% in May to 12.3% in June, while the original plan was that it would stand at 48.3% by then. The budget’s good condition stems from notably higher than expected tax revenues in all categories, in turn achieved on robust economic growth, increasing employment (4.6% y/y in June), and rising salaries (close to 8% in H1). Even if we assume that economic growth will slow down to 5%, the surplus of tax revenues in the second half of the year could reach PLN 10 billion.

Macroeconomics

BRE Bank Securities

1 August 2007 9


Financial Sector Pengab down, bankers speak of trend reversal The bank industry’s sentiment gauge was down 4.6pts m/m to 33.4pts in July. Declines were recorded both in the index of the current industry momentum (down 4.5pts), and in the leading indicator (down 4.8pts). The indicator of the general sentiment among bank branches also shed a notable 6.8 pts. The Pengab fell for the third month in a row, and will continue on its downward curve according to Pentor research. Loan prices rise, and a 25bps interest rate hike is lurking around the corner. Pentor’s president says that the quality of the loan portfolio is deteriorating, and that we are dealing with a reversal in the upward trend, spurred by the situation in the lending and savings market. He believes that market momentum stands solely on home loans and corporate loans. Other areas of the bank industry are deteriorating, which could be interpreted as a sign of an economic slowdown in the second half of the year. The survey was conducted between July 6th and 13th at 200 bank branches. Relative to July 2006, the Pengab is down 6.9pts, marking the second month of y/y decline, and is at its lowest since February 2006 (33pts) and March 2005 (28.7pts). Pentor interprets this as a trend reversal, but we are reminded of a similar situation when the Pengab fell for three consecutive months (December 2005-Feburary 2006) just to rebound and reach new highs later. Back then, the explanation were seasonal factors and lesser client activity in the first quarter. This time, the decline took place in the second quarter. We are waiting to see how the index will behave in August. If it slips again, pulling down sentiment in the industry, a decline in sales is likely, affecting the H2 earnings of banks.

BIK issued 7 million credit reports in H1’07 The Bureau of Credit Information (BIK) issued 7 million credit scores to banks in the first half of the year (34.4% more than a year earlier). 1.4 million credit reports were issued in June (a 20.4% increase y/y). The lending industry is still booming, although growth has slowed from its peak 50% rate. This, however, is an aftermath of the borrowing rush before the enforcement of Recommendation S in June 2006, which created a high comparable base. Mortgage loans up 60% y/y in May According to the Polish Bank Association (ZBP), banks extended PLN 22bn-worth of mortgage loans from January to May, marking a 60% increase on the same period a year earlier. Complete FQ2 data will be released at the end of August. The number of facilities granted was 130,000 up 30% y/y. The ZBP’s full-year sales forecast for mortgage loans is PLN 54bn. We predict that banks will lend PLN 57bn toward home purchases in FY2007, marking another year of buoyant growth (over 28% y/y). Going forward, sales are bound to flatten, as loan portfolios continue to grow at robust paces, but not as robust as this year and last against a high base.

Pengab

Source: ZBP

25.124

.5

29.7

26.529

.8

27.627

.1

32.234

.534

.3

30.8

29.428

.828

.128.7

33.634

.535.8

34.5

3436

.236.8

42

39

35.8

3335

.1

40.9

37.43

9.240

.939

.943

.443.6

40.339

.5

38 38.340

.744

.1

40.5

38.1

33.4

15

20

25

30

35

40

45

50

Jan-0

4

Mar-04

May-04

Jul-0

4

Sep-04

Nov-04

Jan-0

5

Mar-05

May-05

Jul-0

5

Sep-05

Nov-05

Jan-0

6

Mar-06

May-06

Jul-0

6

Sep-06

Nov-06

Jan-0

7

Mar-07

May-07

Jul-0

7

PENGAB

BRE Bank Securities

1 August 2007 10


Factoring sales The largest member of the Polish Factors’ Association (PZF) is ING Commercial Finance with sales at over PLN 2bn (up 33% y/y), followed by Pekao Faktoring (PLN 1.7bn, down 4% y/y), and Polfactor (a subsidiary of BRE Bank, PLN 1.7bn in sales, up 26% y/y), then GMAC Commercial Finance (PLN 1.2bn, +50% y/y), and BZ WBK (PLN 475m, +37% y/y). Combined, members of the PZF generated PLN 7.8bn in sales, marking a 23% increase on a year earlier. If we add to this the factoring departments of other banks which have released their sales figures (PLN 5.2bn), the grand total for factoring sales stands at over PLN 13bn, which is 49% more than a year ago. We maintain that the soaring factoring sales are a sign of a sustained rebound in corporate activity. Such a pickup in sales will drive factoring income for banks, although the impact is still inconsiderable from the standpoint of large bank organizations. Record year for lease finance Lease finance is growing on the back of increasing investments and demand for cars. The market soared 70% y/y in the first half of the year. A total of PLN 15.4bn-worth of assets were leased in H1 (PLN 14bn in movables, PLN 1.4bn in real estate). The data was compiled by the Polish Association of Leasing Companies (ZPL), which has 31 members. The industry expects this strong momentum to continue, and companies are expanding capacity to be able to handle the rising customer activity. This is a good year for banks with exposure to corporate clients. Client loyalty survey According to a survey by Rzeczpospolita, Poles make a very loyal clientele in general, with the only exception of homebuyers. Only 3% of respondents admitted to changing banks in the past year. There was no age, sex, education, income, or any other pattern in this group (only that the “churn” among people with higher education was higher at 5%). Few respondents plan to change banks in the future. 42% will probably stick with their current service provider, 5% are undecided, 2% might switch, and 1% will definitely change banks. Over half said “I don’t know.” Only 54% of the entire population of Poland uses bank services. 38% of Poles do not have a personal account, and 57% do not use payment cards. The main conclusion to be drawn from the survey is that quality and competitive offers are not the key to the average client’s heart for now. One exception are homebuyers. Because only 54% of Poles use bank services at all, the “unbanked” population hides the greatest growth potential. Mortgage lending restrictions Krzysztof Rybiński, Deputy President of Poland’s central bank, the NBP, would like to put tighter restrictions on mortgage lending by banks. He believes that the current policies are not sufficient to protect banks against bad debt, plus, they drive demand for homes, and hence property prices, to record levels. He put forth two solutions: to shorten the maximum financing period, and reduce the maximum loan amount to 100% of the property value. In our view, such restrictions would invite competition from other countries to our market pursuant to cross-border arrangements. Banks abroad often offer financing periods longer than our banks (our Millennium has a 45-year CHF loan and a 50-year PLN loan). We believe that the demand for mortgage loans will decrease after interest rate hikes. PLN 100bn property loans The value of property loans granted exceeded PLN 100 billion in June. Of this amount, PLN 96bn were home loans. June was another month when PLN debt was growing faster than CHF debt. According to Open Finance, property loans will continue to grow as Poland catches up with EU countries. We agree, although we predict that it will be harder for lenders to show sales growth levels as robust as to date going forward. Last year’s sales stood at PLN 44 billion, and this year’s forecast is PLN 54-57 billion (growth by 23% - 29%). Although growth rates will not look as impressive as they have to date, the overall loan portfolio will continue on its sharp upward curve. Poland’s banked population An Acxiom Polska survey commissioned by Open Finance shows that over 30% of all Poles do not have bank accounts. The percentage of the unbanked population differs from survey to survey. But the conclusion is the same: there are still a lot of Poles who need to be convinced to use banking services, and this group is the source of immense growth potential for banks. Co-op banks doing better every year Cooperative banks are quickly increasing their loan portfolio; the industry's total was up 29.7% y/y at the end of June. Deposits rose at a slower pace of 18.2% y/y as bank clients are increasingly putting their savings in investment funds and real estate. The expansion of the asset base (the sector’s total was up 18% y/y) goes hand in hand with income growth: total net income generated by co-op banks in FH1 amounted to PLN 344m, marking a 33.9% increase on a year ago. The fact that the bottom line rises at twice the rate of the topline means that expansion costs are under control. Co-op banks are thriving amid a buoyant industry momentum and increasing activity of small-town retail clients, achieving robust growth rates thanks to cost cuts.

BRE Bank Securities

1 August 2007 11


Ad expenditure slows down According to Expert Monitor, banks spent PLN 213m on advertising in FQ2’07 (adjusted for discounts) and PLN 328m year to date. Ad spend is displaying a slowdown. While last year’s budgets were set to increase by 60% y/y, this year, this growth is down to 20% y/y. This is just a little over the growth rate recorded by the overall advertising market, which increased 16% y/y. The biggest spender among banks was ING BSK (PLN 26m in H1’07 net of discounts), followed by Eurobank (PLN 23.4m), PKO BP (PLN 22m), Millennium (PLN 17.7m), and BPH (PLN 17.5m). The nominal expenditure reported in the release should be adjusted for discounts. A slowdown in ad spend growth could have been expected given last year’s high base. La Caixa launched Polish ops Spain’s largest savings bank opened its first branch in Warsaw in July, its first operation in the CEE region. Should the bank decide to expand in our region, it will either take the organic growth path, or acquire an existing bank. La Caixa is scheduled to open a branch in Bucharest, followed by Hungary and Bulgaria. Initially, the bank will focus on mortgage loans, consumer loans, and provision of banking services to Spanish corporations (close to 90% of Spanish firms with operations in Poland have chosen La Caixa to manage their finances). La Caixa is one of several international players who have noticed the potential lying in our market recently. Since it has not revealed its market share ambitions, it is hard to tell what impact it will have on local banks. But competition is bound to heat up once the Spanish player decides to expand. Eurobank plans to launch a mortgage loan offering? If Eurobank decides to launch its own mortgage loan offer, it will do so with the aim of moving to the market’s top ten. At present, the bank sells the products of its competitors. The decision is expected by the end of September. A mortgage lending business will require internal reorganization (a dedicated department, redesigning of the branches). Also, the strategic investor Societe Generale has to OK the plans. A mortgage loan offering would necessitate some dramatic changes in the bank’s MO – after all, it is one thing to have clients walk in for a quick cash loan, and a whole other thing to cater to prospective homeowners. A new player on the market is always bad news for listed banks. The pie to be shared is only 100%, and a new rival might make it difficult to reach market share targets. Fortis Bank goes into insurance The Fortis group will launch an insurance business before the end of the year, offering both life and non-life coverage. Fortis is another player after BRE Bank to move into insurance, a move that PKO BP has also been pondering. One example of a bancassurance success story are the Polish subsidiaries of the Belgian KBC group, Kredyt Bank and Warta, which, although they do not have mutual equity ties, work together to advance the KBC’s global strategy. Dominet Bank’s new strategy waiting for green light from Fortis The strategy framework, prepared by a team led by Jacek Obłękowski, is ready and pending approval by the Belgian owners. The main objectives are to multiply the number of branches (now 180 including “credit points”) in a few years (by establishing owned branches as well as franchise outlets). The target for FY2007 is to increase the number of partner branches to 200 and launch 130 credit agencies. Other tasks include development of e-banking channels and closer partnerships with financial intermediaries. Furthermore, Dominet is to move out of its car-and-consumer-loan niche and focus on the most popular financing products: credit cards and mortgage loans (it is not clear whether the bank wants to offer PLN loans exclusively, or also FCY loans), as well as accounts, cash loans, and savings products. Dominet Bank’s target customers are individuals and SMEs. We predict that Dominet Bank will “grow up” to be an increasingly formidable rival for listed banks in the medium term. In the near term, its impact on the competitive environment is negligible. BGŻ to take itself public in 2008 WSJ Polska reports that shareholders of BGŻ agreed to take the bank public in the first half of 2008. BGŻ’s three main shareholders are the State Treasury (37.32%), Rabobank (44.51%), and the European Bank for Reconstruction and Development (12.82%). There were plans earlier to buy the EBRD shares back through Rabobank. There has been no official confirmation from BGŻ yet, but we might hear it after the August 23rd meeting of shareholders. We are waiting for an official comment. BGŻ’s equity as of year-end FY2006 was PLN 1.59bn, with assets amounting to PLN 18.6bn and net income reported at PLN 103.9m. These figures imply a FY’06 ROE of 7.1%, and a FY’06 ROA of 0.6%. From among listed banks, only Getin Holding (which consists of two banks) has smaller assets, but it also has better financial indicators. At the time of the planned IPO, BGŻ’s shares should include a discount relative to other listed banks with better performance indicators. Financial intermediaries Financial intermediaries extended ca. PLN 5.77bn-worth of mortgage loans in the first half of the year, according to reports released by seven of them (almost the whole of the market). The

BRE Bank Securities

1 August 2007 12


sales leader was Expander (PLN 2.15bn), followed by Open Finance (PLN 2bn), and Notus (PLN 587.7m). The top-three lineup has not changed, but the leaders increased sales by 59%, 67%, and 80% respectively from last year. The overall market surged 66% from PLN 3.47bn in H1’06. The latest trend among financial intermediaries are investment products. Financial intermediary sales are driven by volumes. In the first five months of the year, banks sold a total of PLN 22bn mortgage loans, marking a whopping 60% increase on a year earlier. First-half figures are not available yet, but there has been a noticeable acceleration in sales generated by financial intermediaries, as homebuyers are increasingly inclined to compare different offers before they tie themselves to a bank. GE Money seeks to sell its 49% stake in Expander In line with earlier announcements, GE Money is looking to sell its minority stake in Expander to an industry investor. Expander’s FY2006 revenues amounted to PLN 53m, and net income came in at PLN 23m (PLN 31m and PLN 11m respectively a year earlier). According to Paweł Majtkowski, trading analyst at GE Investment, GE Money hopes that the buyer will strengthen Expander’s trading business. Expander enjoys strong financial performance. We expect financial agents to improve their earnings considerably this year thanks to a continued home loan boom. Notus seeks PLN 50m to advance growth The financial intermediary is looking for a new investor willing to finance its growth projects (incl. quadrupling of the number of outlets) and marketing campaign. A proposal to prospective investors has been sent out, putting forth a capital injection in exchange for Notus’s shares. Dom Kredytowy Notus is ranked the third largest mortgage loan broker in Poland (FY2006 sales at PLN 804m, FY2007 first-half YTD sales reached PLN 580m). Its sales target for FY2007 is PLN 1.5 billion, expected to double in FY2008. Notus has ambitions to become the market leader. It has considered going public, but opted for other ways of acquiring capital. However, a future debut on the WSE is not out of the question. Financial intermediaries are gaining popularity among bank clients, especially home mortgage borrowers. Their position is sure to continue to strengthen in the years ahead. Notus looks for a strategic investor Dom Kredytowy Notus is looking for a strategic investor. The plan is to raise share capital as well as for existing owners to offer their shares. Combined, the intermediary will offer a 75% shareholding stake to the new owner. Notus currently has five owners, each with a 20% interest. The search is on, and memos have been sent out to 50 leading financial organizations in Poland and abroad. Notus’s main goal is to take lead of the market. The ownership reshuffle is expected to end in early 2008. Notus’s FY2006 loan sales amounted to PLN 803m, and the target for this year is PLN 1.55bn. In FH1’07, Notus acted as the middle man for PLN 578.7m-worth of mortgage loans (vs. PLN 326.5m in FH1’06). A-Z Finanse to make market debut next year The financial intermediary is planning a market debut for next year. The prospectus will be filed with the KNF in late 2007/ early 2008, and the shares will hit the WSE some time next spring. Talk is of a 20% new equity issue, as existing shareholders do not want to sell their shares. The offering is estimated at around 15 million zlotys. YTD, A-Z Finance sold PLN 75m-worth of trading products and intermediated PLN 90m loans. Among its plans for next year are a 350-strong account manager headcount, PLN 300m in trading product sales, and PLN 250m-worth of mortgage loan sales. Financial intermediaries have been in the spotlight lately. Many are looking for strategic investors. GE, the owner of Expander, wants to sell its 49% stake to an industry investor able to strengthen trade product sales. We can expect to see other intermediaries alongside A-Z Finanse and Open Finance (a member of Noble Bank) debut their shares on the stock exchange in the future. Getin Holding: Factor in Bank grows sales Getin Bank’s factoring brand “Factor in Bank” reported that its sales more than doubled (up 111%) in FQ2’07 compared to FQ2’06 (PLN 335m vs. PLN 168m). Factor in Bank caters mainly to SMEs. Such robust sales bode well for the overall FQ2 earnings picture. Getin Bank sold PLN 651.6m car loans in H1’07 Car loan sales soared 55.8% in H1’07 relative to H1’06 (PLN 418m). This sales growth was no doubt driven by a rebound in the car industry. Getin Bank generated PLN 651.6m in sales in the first half of the year, grabbing the Number One slot from Santander Consumer Bank (PLN 598.2m). Getin Bank markets its products through a chain of 130 branches and 700 partner outlets (new and used car dealerships, loan intermediaries). Its portfolio consists mostly of used cars, but the share of new cars is increasing. As for client breakdown, 60% are individuals, and 40% are corporations. Santander held on to its leading position in the segment of new cars. These successful statistics bode well for the FQ2 earnings outlook.

BRE Bank Securities

1 August 2007 13


Getin Holding: Fiolet to be merged with Getin Raty Getin Holding has plans to merge its two financial intermediaries. The merger plan has already been filed with the court. Getin Raty will be incorporated by Fiolet and dissolved. This is part of an ongoing internal restructuring exercise at Getin Holding, which owns 60% of Fiolet and 100% of Getin Raty. Both the subsidiaries are holding shareholder meetings in September to vote on the merger, with Fiolet acting as the acquirer. To finance the takeover, it will issue 520 new shares for PLN 520,000. Getin Raty’s shareholders will get one share of Fiolet for every 308.63 shares of Getin Raty. Noble Bank: Noble Funds TFI shares sold to managers Noble Bank, formerly a 100% owner of Noble Funds TFI, sold a portion of its interests to Mr. Mariusz Staniszewski, Mariusz Błachut, Ms. Sylwia Magott, and Mr. Paweł Homiński, in fulfillment of a prior agreement. Messrs Mariusz Staniszewski and Mariusz Błachut acquired 9.904 thousand shares of common bearer stock each for a total PLN 49.52 thousand (PLN 5/share, their combined stakes represent 9.9% of the share total), while Ms. Sylwia Magott and Mr. Pan Paweł Homiński acquired 2001 thousand shares each for PLN 10005 (PLN 5/share, 2% stake in total each). The combined shares sold account for 23.8% of Noble Funds TFI’s all shares outstanding. The sale was part of a management incentive plan. Noble Bank: Open Finance’s H1 sales Noble revealed Open Finance’s loan and savings sales figures for the first half of the year: loan sales amounted to PLN 2 billion (PLN 1.2bn a year earlier, PLN 2.9bn in FY2006), and trading product sales reached PLN 443m (PLN 137.9m a year earlier, PLN 300m in FY2006). These are excellent figures. Loan sales surged 67% on last year, and investment product sales exceeded last year’s full year sales, chalking up a staggering 221% increase year on year. Noble Bank: Debt issue Noble Bank issued three-year deposit certificates with a total value of PLN 270m, and five-year debt certificates worth PLN 80m. Interest was set based on WIBOR plus margin. This is a follow-up to an earlier announcement of a PLN 500m offering, of which PLN 350m-worth of deposits have been sold. The capital raised will be used to finance the lending business of Noble Bank’s subsidiary MetroBank.

BRE Bank Securities

1 August 2007 14


Analyst: Marta Jeżewska19 Last Recommendation: 2007-05-31(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 2 175.5 2 238.9 2.9% 2 346.1 4.8% Number of shares (m) 28.7Interest margin 3.5% 3.5% 3.6% MC (current price) 27 883.5Revenue f/banking oper. 3 533.6 3 646.0 3.2% 3 873.0 6.2% Free float 25.3%Operating profit 1 853.8 2 171.2 17.1% 2 195.8 1.1%Gross profit 1 633.6 1 895.1 16.0% 1 898.6 0.2%Net prof it 1 267.8 1 493.7 17.8% 1 491.6 -0.1%

ROE 19.2% 21.1% 20.0% Price change: 1 month -0.2%P/E 22.0 18.7 18.7 Price change: 6 month -9.3%P/BV 4.1 3.8 3.7 Price change: 12 month 16.4%D/PS 30.0 36.2 42.7 42.6 Max (52 w eek) 1 088.0Dyield (%) 3.1 3.7 4.4 4.4 Min (52 w eek) 760.0

Current price: PLN 971 Target price: PLN 1079BPH (Accumulate)

600

750

900

1050

1200

2006-07-25 2006-11-14 2007-03-07 2007-07-02

BPH WIG

We are reiterating an ACCUMULATE rating on BPH. We expect the stock to rally after UniCredit receives permission to conduct the spin-off from bank supervision, which is taking its time with the decision. Once the necessary clearance is in place, UniCredit can sell the Mini-BPH and transfer remaining assets to Pekao. We maintain our tip that BPH shares are an option to buy into the post-merger Pekao. Pekao currently trades at PLN 258.1/share, while BPH is priced at PLN 971/share, of which PLN 852/share is the market 's valuation of the assets to be transferred to Pekao, and PLN 119/share is the value attached to the Mini-BPH. Our valuation of the Mini-BPH translates to PLN 191 per share of BPH. A market price of PLN 119 per share implies the Mini-BPH’s market cap at PLN 3.4 billion (ca. EUR 904m). This is below market estimates predicting that the Mini-BPH will be sold for less than EUR 1 billion. GE Money – new terms, acquisition agreement not before January? The talks with GE Money are still on. According to press reports, GE is changing terms and stalling to knock the price down. The Americans are in no hurry, sparking speculation that the deal will not become final before early next year. In a completely opposite account, Gazeta Prawna claims that the deal is close to being sealed. If GE and UniCredit do not make a deal, there will be a new tender for the shares of Mini-BPH. UniCredit refuses to comment, saying only that all the talks should end by the end of the year. It seems that every paper has its own version of the story. UniCredit is declining comments. We are still concerned that a delay in the merger is not good for wither of the banks, but it does not affect Pekao’s chances to achieve cost synergies in FY2009, as planned (EUR 60m, PLN 240m - this target was reiterated in Pekao’s presentation during a UniCredit summit in Milan). Did UniCredit talk to PZU? According to unofficial sources quoted by Parkiet, BPH talked to PZU about selling its shares in the Mini-BPH even though an exclusive right to negotiate the purchase had been granted to GE Money. We suspect that it was only a tactical move on the Italians’ part. In our view, the negotiations with GE Money will end as soon as UniCredit receives permission for the BPH spin-off. The faster this happens, the better for the merger. GE might stall making a commitment as long as UCI does not receive spin-off clearance. Barring any comments from either UCI or GE Money, all reports we have been hearing lately regarding their negotiations are mere speculation.

BRE Bank Securities

1 August 2007 15


Analyst: Marta Jeżewska44 Last Recommendation: 2007-07-05(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 1 034.2 1 228.6 18.8% 1 450.5 18.1% 1 663.8 14.7% Number of shares (m) 73.0Interest margin 3.3% 3.4% 3.5% 3.6% MC (current price) 20 501.8Revenue f/banking oper. 2 365.2 2 922.0 23.5% 3 390.7 16.0% 3 827.7 12.9% Free float 29.5%Operating profit 1 084.1 1 534.4 41.5% 1 852.1 20.7% 2 123.6 14.7%Gross profit 689.5 1 065.5 54.5% 1 515.4 42.2% 1 756.0 15.9%Net prof it 758.2 1 080.6 42.5% 1 233.2 14.1% 1 395.2 13.1%

ROE 20.7% 25.2% 25.0% 25.2% Price change: 1 month -4.8%P/E 27.0 19.0 16.6 14.7 Price change: 6 month 3.2%P/BV 5.2 4.5 3.9 3.5 Price change: 12 month 37.3%D/PS 6.0 6.0 8.9 10.1 Max (52 w eek) 315.3Dyield (%) 2.1 2.1 3.2 3.6 Min (52 w eek) 182.0

BZ WBK (Hold)Current price: PLN 281 Target price: PLN 284.1

170

210

250

290

330

2006-07-25 2006-11-14 2007-03-07 2007-07-02

BZ WBK WIG

We expect strong second-quarter earnings figures from BZ WBK. Broad exposure to corporate clients and equity markets will be the driving force behind bank earnings aside from Retail. Income will receive an additional boost from dividends from CU (PLN 60.33m) which are 13.8% higher this year than last. The bank trades on a ’07E P/E ratio of 19, i.e. below the sector average of 20.6, but we believe that its stock already prices in the good FY2007 earnings outlook. Our FY2007 net income estimate for BZ WBK is PLN 1081m (an expected 42.5% increase on FY2006). We are reiterating a hold rating. Incentive plan BZ WBK launched the implementation of its new incentive plan (“PM II”). One component is an offering of 78341 convertible bonds for PLN 0.01 apiece, with redemption set at November 30th, 2010 at the latest. One bond warrants the right to purchase one share of BZ WBK with an offering price of PLN 10. This means that a maximum of 78341 shares will be issued under the PM II. The PM II is essentially structured in the same way as the first edition, the “PM I,” which expires in 2009. The two plans differ in such details as eligibility requirements and profit growth thresholds. Under the PM II, the equity was raised by PLN 1.5m by way of a conditional offering of “I” shares. BZ WBK is going to issue 150,000 senior bonds convertible to “I” shares. The number of shares awarded will depend on EPS growth during the effective term of the plan. Bond holders will receive maximum awards if the cumulative real increase in the EPS reaches at least 16% within the plan’s effective term, 25% of the maximum award if real cumulative EPS growth is 8%, and proportional allocations within a 25%-100% range if real cumulative EPS growth falls within the range of 8% and 16%. As for the PM II plan, it provides for a minimum real CAGR during its effective term of 16%. Our FY’06-’09 CAGR forecast is 22.5% which, if met, would also guarantee maximum share awards. AIB buys AmCredit AmCredit is one of the largest mortgage finance providers in the Baltic Sea region. Established in 1997, it runs operations in Lithuania, Latvia, and Estonia through 13 branches employing 145 people. AIB wants to expand AmCredit’s mix beyond just mortgage loans. This acquisition will have no impact on BZ WBK since there are no equity ties between the two AIB subsidiaries. The Baltic countries have been the focus of attention of Polish banks looking to expand in the Ukraine, Romania, Bulgaria, as well as Russia. AmCredit will not stand in the way of BZ WBK’s expansion, on the contrary, its sales network can serve BZ WBK should it decide to grow internationally. Following the wave of Poles emigrating to Ireland, BZ WBK had an upper hand over other banks in the sales network of its Irish parent. Fitch maintains rating Fitch reiterated its “A Plus” credit rating for BZ WBK, the short-term rating at "F1,” the individual rating at “C,” and the support rating at “1,” with a stable outlook. New MB appointment On July 27th, BZ WBK’s supervisory board appointed Mr. Andrzej Burliga to the management board. Mr. Burliga has been with the bank since 1995, first as dealer, then as senior dealer and chief dealer. From 1998 to 2001, he was deputy head, and then head of Treasury, and from 2001 to 2006 he ran the Risk Department. In 2006, he became Assistant Risk Management Manager. BZ WBK’s management has always consisted of the right people in the right places, and, like the earlier CEO appointment, Mr. Burliga’s nomination will no doubt ensure continuity and consistency.

BRE Bank Securities

1 August 2007 16


Analyst: Marta Jeżewska12 Last Recommendation: 2007-08-01(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 1 026.4 1 173.2 14.3% 1 336.9 14.0% 1 497.0 12.0% Number of shares (m) 130.7Interest margin 3.0% 3.1% 3.2% 3.4% MC (current price) 14 764.5Revenue f/banking oper. 2 096.3 2 298.4 9.6% 2 583.6 12.4% 2 848.5 10.3% Free float 25.0%Operating profit 801.8 857.8 7.0% 1 075.4 25.4% 1 269.4 18.0%Gross profit 796.3 832.1 4.5% 820.1 -1.4% 1 007.5 22.8%Net prof it 657.1 664.3 1.1% 816.0 22.8% 964.5 18.2%


Current price: PLN 113 Target price: PLN 109Handlowy (Hold)

50

65

80

95

110

125

140

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Bank Handlowy WIG

Bank Handlowy's second-quarter announcement is slated for August 9th. We predict a net income of PLN 149m (up 38.5% on FQ2’06), on an operating income before provisions of PLN 196m (a 44% increase), and believe that the FQ2 results are already priced in the bank’s stock. Earnings might turn out better than expected if Bank Handlowy reverses more provisions (we forecast PLN 13m charge-offs), and worse than expected if debt revaluations prove unfavorable. We will pay special attention to the reported EBIT before provisions which reflects the effects of the new Retail strategy and the progress made in rebuilding the corporate portfolio. The small charge-offs or recoveries posted under provisions in recent periods were owed to delinquent loan collections and restructuring rather than the bank’s day-to-day operations. Considering that Bank Handlowy’s stock has shed 8% since our previous Monthly Report, we are upgrading it from Reduce to hold.

BRE Bank Securities

1 August 2007 17


Analyst: Marta Jeżewska017 Last Recommendation: 2007-08-01

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 936.3 1 081.8 15.5% 1 242.5 14.9% 1 393.0 12.1% Number of shares (m) 13.0Interest margin 2.1% 2.1% 2.1% 2.1% MC (current price) 12 645.7Revenue f/banking oper. 1 755.4 2 079.6 18.5% 2 366.3 13.8% 2 625.9 11.0% Free float 18.5%Operating profit 539.6 741.5 37.4% 917.7 23.8% 1 071.4 16.8%Gross profit 705.6 753.3 6.8% 774.5 2.8% 886.4 14.5%Net prof it 591.4 619.4 4.7% 708.9 14.4% 827.3 16.7%

ROE 16.2% 15.9% 16.8% 17.8% Price change: 1 month -3.0%P/E 21.4 20.4 17.8 15.3 Price change: 6 month 16.5%P/BV 3.4 3.2 2.9 2.6 Price change: 12 month 54.6%D/PS 27.5 27.9 23.8 27.2 Max (52 w eek) 1 075.0Dyield (%) 2.8 2.9 2.4 2.8 Min (52 w eek) 609.0

ING BSK (Hold)Current price: PLN 972 Target price: PLN 953.5

500

600

700

800

900

1000

1100

2006-07-25 2006-11-14 2007-03-07 2007-07-02

ING BSK WIG

ING BSK's second-quarter announcement is slated for August 8th. Our expectations are PLN 161m for net income (5.2% less than a year ago), and PLN 196m for operating income before provisions (34.5% Y/Y increase). The reason for the projected decline on a year ago are provision charge-offs (which we estimate at PLN 8m, 0.2% of average net loans), as, last year, the bank recorded PLN 46m in net recoveries in the second quarter. In our opinion, ING BSK’s stock already factors in the expected growth in this year’s recurring EBIT before provisions which we estimate at PLN 747m after a 37.4% increase on FY2006. Our FY2007 net income forecast is PLN 619m, suggesting an ‘07E P/E of 20.4 at the current price level (the average for comparable banks is 20.9). ING BSK is trading 10% below the level recorded on the date of our previous Monthly Report, hence, we are upgrading it to hold. Consumer loans expected to chalk up double-digit increase ING BSK expects that the upward trend in cash loans will continue, driving its own portfolio at double-digit rates. The bank’s cash loan portfolio as of Q1’07 amounted to PLN 14.8bn, including 11.3bn in corporate borrowings. Three-month sales of cash loans stood at PLN 227.4m, PLN 31m more than a year earlier (16% y/y increase). One sales driver was the deployment at the beginning of the year of a dedicated application supporting customer service. We expect the most robust growth from ING BSK’s corporate lending business. Corporate loans account for 76% of total borrowings. The PLN 3.4bn retail portfolio consists of mortgage loans (PLN 1.7bn in FQ1), as well as cash loans, credit card debt, overdrafts, etc., which account for 12% of the retail portfolio (down 4% in FQ1’07). Double-digit growth is obviously good news, although with a negligible impact on ING BSK’s earnings. ING BSK named the most active bank in the cash market in H1’07 In a survey by the National Bank of Poland (NBP), ING BSK is followed by BRE Bank and BPH. The list is comprised of 17 banks competing to become the Number One cash market dealer in 2008. The criteria are a bank’s activity in the market of Treasury securities and NBP money bills. In our view, this is a harbinger of strong earnings results from ING BSK’s cash market performance in the second quarter. The bank has always been very active in this market, as, since loans make up only a fraction of its interest-bearing assets, it can invest client savings in financial markets.

BRE Bank Securities

1 August 2007 18


Analyst: Marta Jeżewska011 Last Recommendation: 2007-07-25(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 780.0 874.2 12.1% 994.4 13.7% 1 144.3 15.1% Number of shares (m) 271.7Interest margin 3.6% 3.7% 3.8% 4.0% MC (current price) 6 479.1Revenue f/banking oper. 1 202.8 1 355.4 12.7% 1 530.9 12.9% 1 745.5 14.0% Free float 14.5%Operating profit 439.8 466.7 6.1% 573.1 22.8% 721.4 25.9%Gross profit 321.4 460.6 43.3% 446.7 -3.0% 495.8 11.0%Net prof it 468.1 361.8 -22.7% 401.6 11.0% 507.9 26.5%


Kredyt Bank (Accumulate)Current price: PLN 23.9 Target price: PLN 26.8

We are reiterating Kredy Bank as an ACCUMULATE, and recommend to increase positions in the stock at the current price levels, seeing an 12% upside potential to our price target. We continue to have a positive outlook on Kredyt Bank. Its stock currently trades at a ’07E P/E of 17.9, compared to the 21.3 P/E average for the other banks in our coverage universe. The average ’07 P/E for banks not included in the WIG 20 Index (ING BSK, Millennium, Bank Handlowy) is 22. In the case of those banks, the market is discounting strong growth at rates exceeding those recorded by the larger banks, and fast-paced improvement in their respective returns on equity. In our view, the same can be expected of Kredyt Bank. At our target, the ’07E P/E multiple would stand at 20.1, still displaying a discount both to the smaller banks, and the bank sector in general. PLN 1.25bn mortgage loan sales Kredyt Bank’s mortgage loan portfolio at the end of June stood at PLN 4.26 billion (vs. PLN 2.55bn a year earlier). 2006 FQ2 sales were reported at PLN 535.22m, and 2007 FQ1 sales stood at PLN 532m. Kredyt Bank managed 557.8 thousand personal accounts as of this June compared to 533.7 thousand in June 2006 (up 4.5%). The numbers for credit cards were 157.85 thousand vs. 89.66 thousand respectively (up 76%). These are excellent sales figures. Our full-year sales forecast for Kredyt Bank is PLN 3.5 billion, which means that the bank has to generate PLN 1.7bn in H2 to deliver. We predict that the mortgage loan portfolio will be worth over PLN 5.1bn by the end of FY2007.At the end of FQ1, the bank had 140,000 of its credit cards in circulation, including 33.9 thousand issued by Żagiel, which is becoming an increasingly important link in KB’s sales chain. Preliminary data for FQ2 shows ca. 18,000 cards sold, similar to the first-quarter’s 16,800 result. We are leaving our earnings projections for Kredyt Bank intact. KB, Warta establish joint subsidiary Kredyt Bank and TUiR Warta established a partnership under the name of “Kredyt Bank Spółka Akcyjna i Towarzystwo Ubezpieczeń i Reasekuracji Warta Spółka Akcyjna.” Kredyt Bank and TUiR Warta made cash contributions of PLN 5,000 each, and both have 50% stakes in the new firm, which was set up to provide support to banking and insurance operations, including through financial intermediation and back office support. Urgently seeking a manager to head Retail According to the WSJ Polska, Kredyt Bank is looking for someone to manage its Retail Banking business. Retail was taken over by Ronnie Richardson after the resignation of Bohdan Mierzwiński, and the CEO is also overseeing the Finance division after it was “deserted” by Konrad Kozik. The WSJ writes that, with Jacek Obłękowski heading Dominet Bank now, Kredyt Bank will probably turn to Wojciech Sobieraj, one of the authors of BPH’s success. His no-competition agreement expires in a month. We are waiting for official information from Kredyt Bank. If the speculation that Wojciech Sobieraj might join its executive ranks is confirmed, the bank’s stock is sure to rally.

13

15

17

19

21

23

25

27

29

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Kredyt Bank WIG

BRE Bank Securities

1 August 2007 19


Analyst: Marta Jeżewska16 Last Recommendation: 2007-07-30(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 650.5 756.1 16.2% 971.4 28.5% 1 189.6 22.5% Number of shares (m) 849.2Interest margin 2.8% 2.7% 2.8% 2.9% MC (current price) 11 039.4Revenue f/banking oper. 1 253.0 1 671.9 33.4% 2 036.6 21.8% 2 408.1 18.2% Free float 34.5%Operating profit 409.4 679.1 65.9% 896.9 32.1% 1 132.3 26.2%Gross profit 709.7 370.7 -47.8% 584.9 57.8% 764.6 30.7%Net prof it 300.8 473.7 57.5% 619.3 30.7% 779.4 25.9%


Millennium (Reduce)Current price: PLN 13 Target price: PLN 12

3

6

9

12

15

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Millennium WIG

Millennium’s impressive second-quarter net income figure (PLN 128m) prompted upward revisions to our FY2007, FY2008, and FY2009 estimates by 24%, 20%, and 14% respectively. Our financial indicator forecasts are also higher than the bank’s own targets revealed in June (FY2009E ROE is 23.8% vs. the bank’s target of 20%, and our FY2009E C/I ratio is 53.5% vs. the bank’s 55%). These projections take into account the costs of opening 100 new branches in FY2008 and FY2009 which were not included in our previous calculations. Millennium trades on FY’07E P/E of 23.3, displaying a premium to the sector average (16% for the other banks in our coverage universe). We rate Millennium as a reduce, with a new nine-month price target of PLN 12/share. Even at our target, the bank’s stock would be priced at 21.5 x ’07 EPS, still showing a premium to the peer group. Buoyant FQ2 Millennium’s net income of PLN 128m was over 30% above our expectations (PLN 96m) and consensus. The main driving forces behind second-quarter growth were financial income and capital gains and exchange gains (a combined PLN 36m higher than expected). Interest income was in line, and fee income exceeded expectations (PLN 141m vs. PLN 132m), thanks mainly to the performance of investment funds, securities brokerage, and card and ATM fees. Millennium realizes higher margins on its capital market operations. The costs of managing the expanding sales network are clearly increasing. Operating costs net of amortization were PLN 8m higher than expected at PLN 232m (up 24% y/y). D&A charges were in line (PLN 16m). The growing expansion costs stem mainly from an increasing staff headcount and performance bonuses. FQ2 provision charge-offs were much lower than the quarter before (down from PLN 34m to PLN 16m, we had forecasted PLN 19m). As expected, volumes sustained the buoyant growth rates recorded in the first quarter. Assets grew 17% y/y, deposits rose 15.6% (compared to 14.3% y/y in FQ1), and loans were up a whopping 57% (vs. 58% in FQ1). Millennium is still on a steep upward curve, and the main driving force behind this growth are mortgage loans whose sales in FQ2’07 amounted to PLN 2.042bn. We predict that the bank will be looking for sources of financing in the periods ahead, probably by taking a more aggressive approach to deposit acquisition. CHF loan Millennium took out a CHF 120m (ca. PLN 271m at the average NBP rate prevailing on July 20th) medium-term loan subject to an interest rate based on LIBOR (CHF) plus margin. The loan has a due date in July 2010, with an option to extend to July 2012. The lending syndicate consists of Bank Austria Creditanstalt AG, Erste Bank der oesterreichischen Sparkassen AG, Raiffeisen Zentralbank Oesterreich AG, Dexia Kommunalkredit Bank AG, and Anglo Irish Bank Corporation plc. Millennium borrows in Swiss francs to finance its lending business.

BRE Bank Securities

1 August 2007 20


Analyst: Marta Jeżewska016 Last Recommendation: 2007-06-06(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 2 377.0 2 552.4 7.4% 2 824.9 10.7% 3 094.0 9.5% Number of shares (m) 167.0Interest margin 3.7% 3.6% 3.7% 3.8% MC (current price) 43 104.7Revenue f/banking oper. 4 656.4 5 047.6 8.4% 5 563.2 10.2% 6 117.2 10.0% Free float 43.1%Operating profit 2 335.2 2 656.8 13.8% 3 087.6 16.2% 3 545.7 14.8%Gross profit 1 873.6 2 203.8 17.6% 2 572.8 16.7% 2 991.9 16.3%Net prof it 1 787.5 2 081.7 16.5% 2 421.2 16.3% 2 775.0 14.6%


Current price: PLN 258.1 Target price: PLN 269Pekao (Hold)

We are reiterating a hold rating on Pekao. The KNB has still not spoken on the BPH spin-off, and its OK is a prerequisite for the merger to move forward. We expect a decision in August or September; any further delay would upset investors. For now, the hold-up has not changed our outlook on the “Large Pekao.” In the near term, Pekao’s stock might rally on FQ2 earnings results which we expect to be strong, with a 17% y/y growth in net income generated from investment fund share distribution, fast-paced zloty mortgage loan growth, and the improving situation of small and mid-sized businesses. We have a PLN 269/share target on Pekao, which is a sum of Pekao’s current value (PLN 256/share) and the synergy achievable on the merger (PLN 13). UniCredit shares to trade in Warsaw Bringing UniCredit to the Warsaw trading floor was one of the arguments that convinced the Polish government to OK the merger. The Italians are keeping to their promise, tentatively speaking about an end-of-year debut. Meanwhile, shares of Austria’s BA CA, now member of the UniCredit group, have to be delisted first. UniCredit trades on an ’07 P/E of 10.4 (Bloomberg). BA CA to buy a Ukrainian bank BA CA is going to take over a 95% stake in Ukraine’s Ukrsotsbank for EUR 1.52bn in the fourth quarter. The price is high, and Pekao could not afford it without significantly raising equity, but it will become involved with helping to manage the acquisition. The merged UniCredit Ukraine and HVB Ukraine (the merger is in progress, and the banks are under Pekao’s management), are supposed to move to Ukraine’s top ten in terms of assets in 4-5 years, and break even in 2008. Ukrsotsbank is a universal bank. It is ranked sixth in loans and fourth in deposits. At the end of 2006, it operated 497 branches (the 7th largest network in the country). UniCredit might conceivably consolidate all of its Ukrainian operations. If Ukrotsbank was merged with UniCredit Ukraine, Pekao would be managing the fifth largest bank in the country. This is great news from the point of view of Pekao's competitive position. Not only will it become the largest bank in Poland after the merger with BPH, but it will also gain the broadest exposure to the Ukrainian market among all Polish banks. We did not foresee the emergence of such opportunities in our valuation of Pekao, but we consider them a major value driver. Pekao might not get control over Ukrainian banks Parkiet quotes unofficial sources at BA CA as saying that there is practically zero chance that Pekao will be given control over the recently acquired Ukrotsbank, Ukraine’s sixth largest bank purchased for $2bn. Ukrotsbank will probably be merged with UniCredit Ukraine, currently in the process of integrating with HVB Ukraine, to create a Top20 player in the local market. According to the Austrian sources, at the very best, Pekao can hope to be given minority shareholdings in the bank that will emerge as a result of the marriage with Ukrotsbank. This is contrary to earlier arrangements which gave control over UniCredit’s Ukrainian subsidiaries to Pekao. UniCredit was supposed to inform the Polish financial supervision authorities about any changes in those arrangements. The Italians claimed that they had obliged and sent a notice to bank supervision of their acquisition plans for Ukraine. If this is true, it is bad news for Pekao. To date, its Ukrainian subsidiaries have not contributed much to the group’s earnings, and were noticeable on the costs side of the income statements rather than the income side (restructuring and development expenses). We do not take into account the possible changes in Pekao’s Ukrainian operations in our earnings forecasts for the bank, although we recognize that, without the control it was promised, Pekao lost an opportunity to expand in a market that offers huge potential, and yielded some ground to PKO BP with its Kredobank subsidiary. This aside, the Ukrotsbank issue might bring about another delay in the Pekao/BPH merger if bank supervision decides to take action to punish UniCredit.

160

200

240

280

320

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Pekao WIG

BRE Bank Securities

1 August 2007 21


Rebranding? UniCredit has not decided yet whether the rebranding exercise currently conducted across its CEE subsidiaries is going to include Pekao. Turkey’s YapiKredit will be the only subsidiary allowed to retain its corporate colors and name. Any rebranding will be done only after Pekao merges with BPH in our view, and will involve a name change. In case of other Polish banks (Kredyt Bank, Millennium), rebranding only consisted in visual redesigning, with good results. It is hard to predict how Pekao’s clients will react, but UniCredit is an internationally recognized brand – a fact that most clients value. Supervisory Board appointments Pekao gained two new supervisory board members in July, Messrs Federico Ghizzoni and Krzysztof Pawłowski. Mr. Ghizzoni replaced Andrea Moneta as UniCredit’s CEE manager.

BRE Bank Securities

1 August 2007 22


Analyst: Marta Jeżewska016 Last Recommendation: 2007-08-01

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 3 808.7 4 444.8 16.7% 5 143.3 15.7% 5 986.8 16.4% Number of shares (m) 1 000.0Interest margin 3.9% 4.2% 4.4% 4.7% MC (current price) 59 000.0Revenue f/banking oper. 6 038.9 7 015.9 16.2% 7 990.5 13.9% 9 098.0 13.9% Free float 43.1%Operating profit 2 705.8 3 571.3 32.0% 4 273.7 19.7% 5 159.9 20.7%Gross profit 2 167.0 2 701.5 24.7% 3 316.1 22.8% 3 868.6 16.7%Net prof it 2 149.1 2 610.1 21.5% 3 042.5 16.6% 3 674.9 20.8%

ROE 22.9% 24.0% 24.4% 26.0% Price change: 1 month 0.9%P/E 27.5 22.6 19.4 16.1 Price change: 6 month 11.9%P/BV 5.9 5.0 4.5 3.9 Price change: 12 month 36.5%D/PS 0.8 1.0 1.3 1.5 Max (52 w eek) 58.7Dyield (%) 1.4 1.7 2.2 2.6 Min (52 w eek) 35.8

PKO BP (Reduce)Current price: PLN 59 Target price: PLN 54.4

30

35

40

45

50

55

60

65

2006-07-25 2006-11-14 2007-03-07 2007-07-02

PKO BP WIG

PKO BP's second-quarter announcement is slated for August 8th. We expect to see a net income of PLN 666m (almost 42% higher than a year earlier), and predict a 21% y/y growth in banking income, propelled by broad exposure to retail, increasing financing needs of SMEs, and the growing strength of investment funds. As far as costs are concerned, we expect y/y growth below the rate of inflation (at 1.1%). We are downgrading PKO BP from hold to reduce. The bank trades at a ‘07E P/E of 22.6, at a 10% premium to its peers. In our opinion, its stock already prices in the 21% net income growth expected for FY2007. A marriage of giants Poland’s Prime Minister Jarosław Kaczyński said in an interview that plans are underway to establish a national finance group by merging Poland's leading finance and insurance organizations PKO BP and PZU, as well as smaller players like Bank Pocztowy. PKO BP’s CEO Rafał Juszczak has repeatedly voiced his support for this idea. A marriage of PKO BP and PZU is an idea that has resurfaced again and again in government plans. No details as to how such a merger would be carried through have been revealed yet, but it is sure to be a huge challenge that will entail many operational risks. If successful, the result would be Poland’s largest financial organization by far. One threat to the implementation of those plans are the looming early parliamentary elections. A national finance group will take several years to build, but, amid buoyant sentiment, investors might discount this opportunity. An increase in market cap and nominal free float could bring about a rally on PKO BP’s stock even if the success of this ambitious venture is by no means guaranteed. PKO BP buys more shares in Kredobank The National Bank of Ukraine gave PKO BP permission to execute a conditional agreement to purchase shares of Kredobank from the EBRD, and acquire almost 6.2 million shares of the Ukrainian bank’s stock, representing 28.25% of share capital. PKO BP paid EUR 17.35m (ca. PLN 66.1m) for the shares from its own cash resources. Since the acquisition plans had been announced back in April, the takeover had no impact on PKO BP’s stock value. Partnership with NatWest PKO BP is going to open its first UK branch in mid-October. Furthermore, the bank entered into a partnership with NatWest, subsidiary of the Royal Bank of Scotland. As the first step, clients will get free wire transfers, and, later on, the bank will launch a mortgage loan offering (clients will be able to buy homes in Poland for income earned in the UK through the London branch). NatWest runs 1636 branches and caters to 10.5m clients a year. The banks hope to lure at least 20% of Polish immigrants in the UK (which is an estimated 400,000 to 1 million people depending on the source), but will work to tap into half of this population. Last year, emigrants sent 6.5 billion euros to Poland. The UK operations are a part of PKO BP’s foreign expansion plans, which mark Ukraine and the UK as the bank’s primary markets. To strike a partnership with an existing UK bank was the best and only solution for PKO BP to achieve its goal to be the banking provider of choice for a major portion of the Polish immigrant population. Free wire transfers are an attractive offer for people who want to send their savings to Poland. That said, we expect that competition is already gearing up to go into battle with PKO BP for this clientele. New subsidiary “Bankowy Leasing” The bank established a new subsidiary “Bankowy Leasing” (with HQ in Łódź) with a share capital of PLN 1.3m, acquired in full by Bankowy Fundusz Leasingowy, PKO BP’s wholly-owned subsidiary. Bankowy Leasing is considered a long-term investment.

BRE Bank Securities

1 August 2007 23


Raising capital PKO BP is seeking three capital injections this year (their amount has not been disclosed). The bank needs capital to finance its mortgage lending business, so, the cash will probably be taken out in CHF. Toward the end of the year, the bank will take out a subordinated loan to stabilize equity. Next year, it might issue bonds. Our outlook remains intact. The mortgage lending needs stem from PKO BP’s broad exposure to Retail and a booming lending business. Syndicated loan PKO BP took out a syndicated loan in the amount of CHF 950m. The financing period is five years, renewable for two further one-year periods. The loan is unsecured, with interest calculated based on LIBOR (CHF) plus margin. Drawing will take place within 270 days from execution of the loan agreement. Eurobond offering PKO BP has a plan to issue several billion-worth of eurobonds in the next five years. The first batch, whose value is not known yet, will be offered in H1’08. As a way of raising capital, PKO BP is also considering taking out a FCY loan. The bond gains will serve to finance the lending business. At the moment, the ratio of deposits to loans stands at 134%, meaning that the bank is benefiting from a relatively cheap source of financing. But, in a few years’ time, when the bank thinks about strengthening the PKO TFI funds, loans will grow much faster than deposits. The long-term debt issue plans might be a sign of the management’s positive outlook on the future. CEO interview Rafał Juszczak discussed his new strategy in an interview for Puls Biznesu. The bank has shifted its focus to the merger plans with PZU, but, instead of just waiting for decisions, it is going to set up its own insurance business. The CEO also reiterated that the bank wants to expand in the Ukraine and talked about possible organizational changes with respect to the pension fund subsidiaries. Speaking of funds, the CEO is considering marketing other funds through its sales network. He confirmed that the agreement with Credit Suisse has to be renegotiated on better terms. A repeat of what has been said many times before. We are waiting for a resolution of the Eureko dispute. We still do not consider setting up an insurance company a good idea. Why pump cash in an undertaking that is going to be incorporated by PZU anyway? And a large insurance underwriter would never be allowed by the government because it would compete with PZU. Instead, PKO BP should tighten its partnership with PZU, with a view to combining offers without merging or setting up subsidiaries like Kredyt Bank and Warta have successfully done. Supervisory Board reshuffle PKO BP’s supervisory board member Adam Skowroński resigned as of July 22nd to assume the function of PKO BP’s voce=president as of July 23rd. This is in line with expectations; Mr. Skowroński was one of the management board appointees during the last executive competition. Acquisition of Bank Pocztowy PKO BP is going to make an offer to the Polish Post next month to buy a 25% stake in Bank Pocztowy (BP). If the offer is accepted, the bank will have control over BP (it currently owns 25% +1 share of its equity). BP’s assets currently stand at over PLN billion, and equity is ca. PLN 165m. In our opinion, the 25% stake should not cost more than PLN 165m (4 x BV). We maintain that, by acquiring BP, PKO BP is not after its assets, but rather its sales network. We would welcome this acquisition as involvement by an industry investor like PKO BP, determined to keep its leading market position, will not doubt be good for Bank Pocztowy’s business.

BRE Bank Securities

1 August 2007 24


Gas & Oil, Chemicals New partners on board with Sarmatia According to reports, the stakeholder ranks of Sarmatia, a company established to build an extension of the Odessa-Brody crude oil pipeline to Płock, will soon include the Azeri SOCAR corporation and Georgia’s GOGC. This is good news for the Brody-Płock venture, which, once launched, should completely eliminate the threat of the Druzhba pipeline being shut down (as this would mean huge sales losses for the Russians). Lotos / PKN merger idea back on the table? According to the Newsweek, the Polish government is considering merging the two fuel giants, with the merger process set to start possibly still this year. The person responsible for bringing the matter back on the table is probably PKN’s CEO Piotr Kownacki, who has the government’s support on this issue. The idea of such a merger has resurfaced again and again, and, although the treasury minister has denied recently that it is being considered, we would not rule it out. Such a marriage would reinforce the State’s position as PKN’s shareholder (we expect a higher valuation for Lotos), which is probably why the government is considering it. From a financial standpoint, certain synergies would be up for grabs for both companies, mainly in the logistics department. But there is still the question of whether such a merger will be allowed by the anti-monopoly authority (although concentration in the energy sector should be looked at from a European rather than local point of view). US gasoline market still strong Weekly gasoline inventory reports from the US are the most eagerly awaited piece of news among crude oil market investors nowadays. Last month's reports failed to provide an answer to the question about how fuel prices are going to behave in the weeks ahead. After weeks of heavy fluctuation, inventories ended down by 0.3mmbbl in the week ended July 20th compared to their level at the end of June. While, at first glance, this seems a safe level from a supply standpoint, investors are concerned about deliveries in light of the fact that the supply-demand balance is expected to be achieved through record-high imports. Although refiners are increasing their CURs, the results in output are negligible, while demand stays historically high. In this environment, any major downtime or failure could hurt supply, which is reason for concern given this year’s hurricane forecasts. The key factor that will determine future fuel prices will be the Department of Energy’s data for the week ended July 27th, expected to show whether the record imports were sustained, and whether demand is still at record levels.

BRE Bank Securities

1 August 2007 25


Analyst: Kamil KliszczLast Recommendation: 2007-08-01

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 12 812.7 11 932.5 -6.9% 11 814.3 -1.0% 14 547.6 23.1% Number of shares (m) 113.7EBITDA 1 101.7 1 027.5 -6.7% 985.1 -4.1% 1 344.6 36.5% MC (current price) 5 992.0EBITDA margin 8.6% 8.6% 8.3% 9.2% EV (current price) 6 019.1EBIT 804.3 650.9 -19.1% 474.4 -27.1% 707.9 49.2% Free float 41.2%Net profit 666.1 491.6 -26.2% 326.0 -33.7% 483.5 48.3%

P/E 9.0 12.2 18.4 12.4 Price change: 1 month 2.9%P/CE 6.2 6.9 7.2 5.3 Price change: 6 month 16.5%P/BV 1.1 1.1 1.0 0.9 Price change: 12 month -0.8%EV/EBITDA 5.3 5.9 7.0 5.7 Max (52 w eek) 58.2Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 38.5

Lotos (Reduce)Current price: PLN 52.7 Target price: PLN 45.8

30

40

50

60

70

80

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Lotos WIG

Like PKN Orlen, Lotos is expected to show strong FQ2 results. However, because the market price has overshot out target, we are downgrading the stock to reduce. The macro settings for refiners have lost some of their recent robustness, and, since long-term refinery-margin forecasts are key to the profitability of Lotos’s wide-scale upgrade program (PKRT), investors might be concerned as they observe the margins narrow (in our opinion, this is only a temporary trend). Petrobaltic to size up Latvian shelf According to unofficial reports, Petrobaltic is going to explore a Latvian shelf lead (probably on commission from the Latvian government). The job for now is a seismic survey (a survey of sound wave movement) to identify potential prospects. Lotos and PKN had also expressed interest in bidding for prospecting and exploration licenses in the Latvian shelf. Petrobaltic’s advantage lies in its track record in surveying this part of the Baltic Sea and the detailed maps it probably has of the region’s seismic lines. It seems that Lotos has a good chance of getting the license. Another upgrade contract Lotos signed another contract with Lurgi as part of its comprehensive upgrade program (PKRT). This one is for design and management of oil distillation facilities with a capacity of 4.5 million tons a year. LNG terminal costs go up PGNiG’s Chief Strategy Officer admitted in an interview for the WSJ that the costs expected to be incurred on a new terminal in Świnoujście might exceed the original budget by EUR 100m. Such an increase in costs could affect the rate of return on this project. Combined with uncertainty about what the price environment will look like at the time the terminal is launched, the risks seem greater. Mining output forecast downgrade PGNiG’s new gas output forecasts are 4.3bn cubic meters in 2007, ca. 4.6bn m3 in 2008, and 5bn m3 in 2009. The previous estimate for 2008 was 5.5bn m3. According to the official release, this revision was prompted by changes in the gas sales agreement with buyers (we are guessing probably KGHM). The copper giant was supposed to buy 0.5bn m3 of gas as of next year, but later changed its mind. But a 0.9bn m3 slash in the 2008 output target suggests that KGHM was not the only one to have reconsidered its gas needs. How this revision will impact PGNiG’s earnings will depend on the terminated contracts. According to PGNiG, its contract with KGHM was a “Take Or Pay” deal, meaning that it was entitled to a compensation in case of termination. Assuming that the 0.9bn m3 will be sold at non-regulated prices, the loss of revenues generated at higher-than-average margins could amount to PLN 500-600m in FY2008.

BRE Bank Securities

1 August 2007 26



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 15 676.5 17 062.0 8.8% 17 300.1 1.4% Number of shares (m) 5 900.0EBITDA 2 900.9 3 089.4 6.5% 3 707.6 20.0% MC (current price) 28 910.0EBITDA margin 18.5% 18.1% 21.4% EV (current price) 27 039.2EBIT 1 465.2 1 510.9 3.1% 2 064.7 36.7% Free float 15.3%Net profit 1 148.9 1 242.3 8.1% 1 703.0 37.1%

P/E 25.2 23.3 Price change: 1 month -5.5%P/CE 11.2 10.2 Price change: 6 month 20.7%P/BV 1.4 1.4 Price change: 12 month 37.2%EV/EBITDA 9.7 9.2 Max (52 w eek) 5.7Dyield (%) 3.0 3.2 3.4 Min (52 w eek) 3.1

PGNiG (Suspended)Current price: PLN 4.9 Target price: -

LNG terminal costs go up PGNiG’s Chief Strategy Officer admitted in an interview for the WSJ that the costs expected to be incurred on a new terminal in Świnoujście might exceed the original budget by EUR 100m. Such an increase in costs could affect the rate of return on this project. Combined with uncer-tainty about what the price environment will look like at the time the terminal is launched, the risks seem greater. Mining output forecast downgrade PGNiG’s new gas output forecasts are 4.3bn cubic meters in 2007, ca. 4.6bn m3 in 2008, and 5bn m3 in 2009. The previous estimate for 2008 was 5.5bn m3. According to the official release, this revision was prompted by changes in the gas sales arrangements with buyers - we are guessing probably KGHM. The copper giant was supposed to buy 0.5bn m3 of gas as of next year, but later changed its mind. But a 0.9bn m3 slash in the 2008 output target suggests that KGHM was not the only one to have reconsidered its gas needs. How this revision will impact PGNiG’s earnings will depend on the terminated contracts. According to PGNiG, its contract with KGHM was a “Take Or Pay” deal, meaning that it was entitled to a compensation in case of termination. Assuming that the 0.9bn m3 will be sold at non-regulated prices, the loss of reve-nues generated at higher-than-average margins could amount to PLN 500-600m in FY2008.

2

3

4

5

6

2006-07-25 2006-11-14 2007-03-07 2007-07-02

PGNiG WIG

BRE Bank Securities

1 August 2007 27



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 52 867.2 60 600.5 14.6% 67 371.1 11.2% 67 393.6 0.0% Number of shares (m) 427.7EBITDA 4 684.7 6 048.7 29.1% 6 650.6 9.9% 6 740.7 1.4% MC (current price) 23 588.2EBITDA margin 8.9% 10.0% 9.9% 10.0% EV (current price) 35 234.8EBIT 2 576.6 3 013.9 17.0% 3 461.1 14.8% 3 318.8 -4.1% Free float 72.5%Net profit 1 986.0 2 079.0 4.7% 2 463.4 18.5% 2 352.5 -4.5%

P/E 11.9 11.3 9.6 10.0 Price change: 1 month 1.0%P/CE 5.8 4.6 4.2 4.1 Price change: 6 month 18.3%P/BV 1.3 1.1 1.0 1.0 Price change: 12 month -8.3%EV/EBITDA 7.4 5.5 5.0 4.9 Max (52 w eek) 60.6Dyield (%) 0.0 0.0 2.1 2.4 Min (52 w eek) 42.5

PKN Orlen (Accumulate)Current price: PLN 55.2 Target price: PLN 61

30

40

50

60

70

80

90

2006-07-25 2006-11-14 2007-03-07 2007-07-02

PKN Orlen WIG

The macroeconomic situation has deteriorated significantly over the past few weeks from the point of view of refiners, as soaring crude prices put downward pressure on margins. But we believe that the recent correction in US gasoline prices is only temporary. Inventory level data clearly shows that the USA has no supply cushion, meaning that any disruption in production could upset the fragile balance. Our calls on PKN Orlen in the near term will largely depend on the US DoE inventory reports which are expected to give a clear picture of how the US fuel market, which has a decisive influence on European prices, is going to behave in the future. Eurobond offering cancelled PKN Orlen cancelled its eurobond offering due to market instability. The value of the offering was set at EUR 1bn. With market interest rates on an upward curve, the spread that Orlen would have to pay to the bondholders has probably widened to much less attractive levels (relative to the bridge financing in place). An opportunity to sell Polkomtel Parkiet reports that the chances of Pokomtel’s shareholders reaching an agreement, and divestment by PKN, are increasing. The buyer would be Vodafone, which has wanted to control a larger stake in Polkomtel for a long time. PKN Orlen could earn as much as PLN 2.7 billion on the Polkomtel stake. But the actual cash flows will depend on the selling price of Polkomtel itself and the TDC shares that PKN is required to buy. Long-term crude purchases contract PKN Orlen signed a contract with Petratrade for deliveries of 2.4 million tons of crude oil annually via the Druzhba pipeline, valid through June 30th, 2010. This is another in a series of PKN Orlen’s recent crude supply contracts. To date, Petratrade sold crude to Orlen through spot contracts, so, a long-term commitment is a change for the better. Speculation mounts about a PKN Orlen / MOL merger Speculation was rife in July that MOL is to be merged with PKN Orlen. According to Gazeta Prawna, this idea has reemerged as a way of tightening the partnership between the two energy giants. While we see no reasons why MOL and PKN should not tighten their business ties, a merger is out of the question in our view, mainly because Orlen has a smaller market cap than MOL, implying a share exchange ratio at terms unfavorable to its shareholders - something that the Polish government will never accept. Paweł Szymański fired from Management Board PKN Orlen’s Supervisory Board dismissed Paweł Szymański on a motion by CEO Mr. Kownacki, replacing him with Dariusz Formela, who has been with the company for nine years, most recently as executive organizational manager and member of Mazeikiu Nafta’s management board. Mr. Szymański enjoyed a good reputation among investors, who will not be happy about his dismissal, but, because this development was not unexpected, PKN Orlen’s stock should not be affected. As for Mr. Formela, his nomination is a sign that Mr. Kownacki’s approach to top management is to promote people who have a history with PKN Orlen (like for instance Mr. Pater) and know its business inside-out. Given Mr. Formela’s track record, his function with the management board will probably be slightly different than Mr. Szymański’s, hence, we expect more appointments in the near future.

BRE Bank Securities

1 August 2007 28


30

50

70

90

110

130

150

2006-07-25 2006-11-14 2007-03-07 2007-07-02

ZA Puławy WIG

It looks like ZAP is about to face a major ownership reshuffle: the State Treasury seems to have succumbed to Ciech’s pleas to sell its ownership interest in ZAP. Furthermore, investors might be concerned by the fact that ZAP’s shareholders put on hold important investment projects developed by the current management. To add insult to injury, the company’s stock will suffer in the near term, as the government seems intent on ousting ZAP's executives who are opposed to the takeover. That said, we consider these to be temporary factors that are secondary from the standpoint of ZAP’s stock value which, in the end, will be determined by the strategy adopted by its future owner. Having adjusted our estimations for the stalled projects, we revised our price target on ZAP downward to PLN 112.27 from PLN 127.98 per share, with an advice to hold at the current price level. Ownership shuffle, CEO fired On motion from the State Treasury, ZAP’s supervisory board dismissed CEO Krzysztof Lewicki (this vote was preceded by several postponements of the extraordinary shareholders’ meeting and a resignation by the workers’ delegate to the supervisory board). The official reason for the dismissal was that the board lost trust in Mr. Lewicki in the spring of last year based on certain confidential information. In our opinion, the real reason was that Mr. Lewicki had a different vision for ZAP than the government, wanting to let it grow as an independent business, while the Treasury and the CEO of Ciech want Ciech to take over and incorporate ZAP into its organization. No CEO appointment At its last meeting, ZAP's supervisory board did not elect a new CEO, and is not expected to do so until September. The board did approve the investment projects put forth by the management board (including a system to reduce nitrous oxide emissions). In a separate statement, the chairman of the board said that the government’s alleged plans to merge ZAP with Ciech have never been officially confirmed, and that the reason behind the dismissal of CEO Lewicki was that he was not keeping the supervisory board up to date on ZAP’s investment projects.


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 2 196.2 2 226.9 1.4% 2 277.3 2.3% 2 312.6 1.6% Number of shares (m) 19.1EBITDA 256.9 264.6 3.0% 299.5 13.2% 317.4 6.0% MC (current price) 2 123.7EBITDA margin 11.7% 11.9% 13.2% 13.7% EV (current price) 1 652.3EBIT 157.5 169.0 7.3% 190.6 12.8% 192.5 1.0% Free f loat 38.4%Net profit 133.7 143.1 7.0% 162.2 13.4% 165.6 2.1%

P/E 15.9 14.8 13.1 12.8 Price change: 1 month -20.1%P/CE 9.1 8.9 7.8 7.3 Price change: 6 month 87.4%P/BV 1.7 1.5 1.4 1.3 Price change: 12 month 80.1%EV/EBITDA 6.9 6.5 5.5 4.9 Max (52 w eek) 138.8Dyield (%) 1.8 1.9 2.0 2.3 Min (52 w eek) 51.2

Za Puławy (Hold)Current price: PLN 111.1 Target price: PLN 112.27

BRE Bank Securities

1 August 2007 29


Telecommunications Streżyńska stays put The consumer court ruled yesterday that Ms. Streżyńska’s appointment to head the Office for Electronic Communications (UKE) was valid and binding, overturning its own previous ruling given in May. We hope that, this time, the verdict is final, and that neither TPSA nor UKE will appeal. TPSA demands refunds from alternative operators TPSA issued a PLN 140m financing request to the UKE to cover the expenses incurred between May 8th and December 31st, 2006, on providing universal services. This is the first such a request in history. An obligation to contribute to TPSA’s network financing binds carriers that achieved revenues over PLN 4m in FY2006. The contribution cannot exceed 1% of such revenues. It is hard to determine whether TPSA’s claim is adequate to the expenses actually incurred, but we suspect that the operator over- rather than underestimated it. The final decision lies with the UKE. What is certain is that TPSA is legally entitled to receive refunds from alternative operators, and that such refunds will become an official practice in 1-2 years. As a result, alternative operators will be faced with additional costs. In case of Netia, these costs can be as high as PLN 8.5m a year. TPSA stands to benefit from this, but we do not change our long-term outlook on the national operator who is about to face a bout of competitive promotional broadband offers (Netia, Tele2, PTC, Polkomtel). Demise of fixed line? In a survey by Gazeta Prawna, 64% of respondents plan to get rid of their landlines. A poll like this is not representative of the entire population, or the entire TPSA customer base. In our view, fixed-line telephony will phase out in two ways: first, with the expansion and decreasing prices of mobile Internet access (which has been developing for several years, so far mostly based on voice services). Second, with the growing awareness and accessibility of devices supporting VOiP. Fair competition will force cheap broadband prices. Users will no longer pay for line subscription AND calls, but just one network access fee. We predict that these processes will accelerate with time. Flat-rate interconnection The UKE issued a decision changing the connection terms between Exatel and TPSA networks by imposing flat-rate interconnection billing in compliance with the RIO. The flat-rate charges for 2 Mbit/s connection traffic are: PLN 2977.54 within a numbering area, PLN 4322.24 for transit calls, and PLN 6299.19 outside of the transit area. In the old arrangement, billing was based on per-minute rates. This is the first flat-rate interconnection agreement in Poland. It gives operators more flexibility in preparing offers for their customers, such as for instance fixed-line rental fees offered without worrying that the subscriber will exceed the number of minutes up to which s/he is profitable for the carrier. Other operators are sure to follow suit soon, with bad implications for TPSA. 38.7m mobile subscribers The Central Statistical Office (GUS) released a report showing that mobile penetration stood at 101.5% at the end of the second quarter, up from 99.2% in the first quarter. There were 38,666,000 active SIM cards in Q2, marking an increase by ca. 850,000 compared to Q1. According to a second-quarter report by Polkomtel (Vodafone), its customer base at the end of Q2 counted over 12,917,000. Polkomtel acquired 254,000 (net) subscribers in Q2, meaning that the other three operators garnered roughly 595,000. It is hard to tell how many of them chose the newcomer PLAY, but we estimate 150,000, with the remaining two operators issuing 220,000 SIM cards each. And, considering that PTC no longer markets via the Germanos store chain, we can assume that Centertel was more successful in acquiring customers. The GUS report shows that the mobile market is growing at half the speed observed a year ago, which is no wonder given the penetration rate. This deceleration goes hand in hand with increasing competition (PLAY, MVNOs) - a combination that is sure to take its toll on the EBITDA margins of mobile carriers. MPay kicks off Polkomtel and ATM’s subsidiary mPay signed a contract to work together on implementing a mobile payments system in Poland. In the first stage, mobile payment services will include parking fees, vending machines, and music downloads, available both at online stores, and regular points of sale. The two partners plan to launch the mobile payments in the third quarter of 2007, and hope to acquire over ten million users in five years. mPay will work to reach other mobile operators by the end of the year. This is an eagerly-awaited development from ATM. mPay is a springboard for a new business (alongside data communications) that will add PLN 51 per share to ATM’s value. We expect mPay’s next step to be expansion into foreign markets.

BRE Bank Securities

1 August 2007 30


Exatel’s business plans The government-controlled telecom operator Exatel is aiming to “steal away” TPSA’s retail customers. The minimum plan is to acquire ca. 200,000 new subscribers, including ca. 50,000 Internet users (sales to be launched in Q4) by 2010. The more extreme targets are four times higher, and include mobile services (Exatel wants to become an MVNO). These are very ambitious plans, but, to succeed, Exatel needs sound decision-making processes and skills that, in our opinion, it has lacked so far. Cash will not be a problem, given that the operator’s main shareholder is Poland's power grid operator Polskie Sieci Energetyczne. CEO switch at Polkomtel Polkomtel’s supervisory board replaced Jarosław Bauc with Adam Glapiński as CEO in a politically-driven move which we disapprove of. Under Mr. Bauc’s leadership, Polkomtel increased market share both in terms of revenues, and subscriber numbers. Huawei to deliver 3G network Centertel signed a PLN 169m (the value of purchases to be made in 2007 through 2009) agreement with Huawei Polska Sp. z o.o. (a subsidiary of Huawei Technologies). The agreement is for setup and maintenance of a 3G radio network in southern and western Poland (around Katowice and Poznań). To date, Centertel has used Nokia and Nortel resources when building radio network infrastructure. Dialog might exceed FY2007 earnings guidance The CEO of Telefonia Dialog Sławomir Szych is happy with the company’s first-half results, and expects this year’s EBITDA and net profit targets to be exceeded. Dialog, a wholly-owned subsidiary of KGHM, had plans to generate PLN 540m in revenues and PLN 135m in EBITDA this year. Net profit is pegged at PLN 20m.

BRE Bank Securities

1 August 2007 31


Analyst: Michał MarczakLast Recommendation: 2006-09-06

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 862.1 971.7 12.7% 1 088.0 12.0% 1 178.3 8.3% Number of shares (m) 389.2EBITDA -68.9 262.0 267.9 2.3% 301.4 12.5% MC (current price) 1 696.9EBITDA margin -8.0% 27.0% 24.6% 25.6% EV (current price) 1 499.9EBIT -341.4 16.8 27.5 63.7% 67.8 146.5% Free float 100.0%Net profit -378.9 -53.1 -86.0% -50.6 -4.6% 4.1

P/E 457.5 Price change: 1 month -3.4%P/CE 9.7 9.8 7.8 Price change: 6 month -8.5%P/BV 0.9 0.8 0.8 0.8 Price change: 12 month 1.2%EV/EBITDA 6.6 6.2 5.2 Max (52 w eek) 5.4Dyield (%) 2.9 1.7 1.7 2.8 Min (52 w eek) 3.7

Netia (Sell)Current price: PLN 4.4 Target price: PLN 3.8

3

4

5

6

7

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Netia WIG

We have an unchanged outlook on Netia. The huge costs of moving into the Internet access market where, sooner rather than later, fierce competition will force margin shrinkage, combined with the growing losses generated by PLAY, will depress EBITDA and deepen the bottom line loss. Netia’s latest broadband offer gives customers virtually free promotional access for either 3- or 6-month periods. But, to deliver this service, Netia has to pay to use TPSA's lines, and these costs will bring the FQ3 loss even further down. We are reiterating a sell rating on Netia. Netia’s new offer Netia revealed the details of its new promotional broadband access offer. Prices for 1 Mb/s connections are as follows: 24-month subscriptions are to cost PLN 0.04 a month in the 1st through 6th billing period, and PLN 59 in the 7th thru 24th billing period; subscribers with 36-month agreements will pay PLN 0.04 / month in the 1st thru 12th billing period, and PLN 49 in the 13th to 36th billing period. Additional charges are a PLN 98.82 installation fee, and a PLN 79 ADSL modem fee (cut from PLN 145.18). Netia currently has 135,000 customers (including 41,000 TPSA subscribers), and aims to acquire a further 65,000 new users by the end of the year. Given the costs that have to be incurred on subscriber acquisitions and the BSA fees charged by TPSA (PLN 28.5 net per month), the monthly ARPU will be far from impressive. Adjusted for the TPSA claims, the pre-tax ARPU from 24-month agreements is a little over PLN 6 per month, making for a total PLN 1.8m in pre-tax revenues a month from 300,000 users. The customer acquisition costs are hard to estimate (marketing, etc). Netia’s offer would make more sense if the operator managed to sell other services to its users, for instance IPTV. But the problem here is demand. Note that, in the initial stage of the promotional period, Netia will report costs incurred from the fees it has to pay TPSA for each new subscriber (PLN 8.5m a month for 300,000 TPSA subscribers using its services), reflecting on the present EBITDA value. Netia’s promotion is a long-term investment in subscribers that will bring losses first, and potential revenues in about six months' time. New framework agreement with TPSA Netia signed a partnership agreement with TPSA, which lays down, among other things, the wholesale rates at which the two operators will settle their mutual payments. The agreement, which enters into force on September 30th, will put an end to the legal squabbles between the two firms. For the past few years, Netia made several million zlotys on the old agreements. The two operators failed to bill each other at wholesale rates, instead keeping the entire income generated by their subscribers (so-called “bill and keep” scheme). Netia accepted calls from other networks at competitive rates, and directed them to TPSA’s network at no charge. This was a good arrangement for the third-party operators who would have had to paid more without Netia as middleman anyway. Given that these revenues have virtually shrunk to zero over the past few quarters, the new agreement will not affect earnings. Settlement with the unions Netia reached an agreement with its workers regarding salary increases. Their scale was not revealed, except that they fit within this year’s budget. Again, salary raises, at least at the scale we predict (up to 30%), are completely irrelevant from a valuation standpoint given that Netia is expected to post a ca. PLM 200m net loss this year.

BRE Bank Securities

1 August 2007 32



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 18 625.0 17 871.2 -4.0% 17 892.6 0.1% 17 705.3 -1.0% Number of shares (m) 1 400.0EBITDA 7 856.0 7 289.2 -7.2% 7 360.8 1.0% 7 055.5 -4.1% MC (current price) 30 884.0EBITDA margin 42.2% 40.8% 41.1% 39.8% EV (current price) 38 039.0EBIT 3 367.0 2 986.3 -11.3% 3 246.6 8.7% 3 119.5 -3.9% Free f loat 46.0%Net profit 2 096.0 1 908.6 -8.9% 2 166.8 13.5% 2 060.4 -4.9%

P/E 14.7 16.2 14.3 15.0 Price change: 1 month -7.9%P/CE 4.7 5.0 4.9 5.2 Price change: 6 month -11.9%P/BV 1.7 1.8 1.8 1.8 Price change: 12 month 4.5%EV/EBITDA 4.8 5.1 4.9 5.0 Max (52 w eek) 26.7Dyield (%) 4.5 8.6 7.4 7.7 Min (52 w eek) 19.2

TP SA (Reduce)Current price: PLN 22.1 Target price: PLN 20.2

14

18

22

26

30

34

2006-07-25 2006-11-14 2007-03-07 2007-07-02

TPSA WIG

We do not expect a strategy announcement from TPSA on the occasion of the FQ2 earnings conference that could create any upside for its stock. It is more likely that the old projections for the different lines of business will be reiterated, while the revenue target will be revised downward. October and November could bring a slurry of harmful development for TPSA, including weak FQ3 results (as competition in broadband access and mobile telephony becomes more and more heated), and a new regulation by the European Commission allowing regulators to divide national operators into independent wholesale and retail parts. TPSA’s stock stays up on the current share buyback (13.76 million shares bought back by July 27th). We are reiterating our advice to reduce at the current price level. TPSA’s strategy according to Puls Biznesu Dziennik quoted inside sources at TPSA speaking about the strategy that the company was allegedly going to announce during the FQ2 earnings conference. The highlight of the strategic plan is reportedly the wp.pl, Web portal that will serve as another pillar of TPSA’s growth. There was also talk of cost cuts, acquisitions, and new services. We have already said that, after the Merrill Lynch leak blooper (under investigation by the Polish Financial Supervision Authority), TPSA is maybe going to unveil a small portion of the new plan during the FQ2 conference, and hold off the rest until some time in November. Without considering what the strategy contains, the market is changing so fast (new operators emerging, falling prices) that the “inert” national operator is not able to respond fast enough on the costs front. Sales have also been far from impressive lately (new products), as best exemplified by live.box. TPSA has to cut line rental fees The UKE issued a decision requiring TPSA to modify the line rental terms set out in the RIO by reducing the rental prices of 2 Mbit/s lines by 42%. TPSA is not going to appeal, and the decision is enforceable immediately. The consequences of the price cut will not become noticeable until FY2008 (after a long procedure which includes signing new agreements with the lessees). TPSA’s quarterly line rental revenues are PLN 90m. F2M price cuts The UKE approved the proposed price changes in fixed-to-mobile calls made by TPSA users. The new prices, which enter into force on September 1st, were slashed by 60% in some cases. They will apply to calls made to PTK Centertel, Polkomtel, and PTC mobile networks. In case of P4, call prices will either rise (by 5.3% to 23.2%), or fall (by 9.2% to 54.6%), depending on the call plan and billing period. TPSA gets new large investor The Capital Research and Management Group reported that its funds hold an over-8% stake in the operator’s equity, although no one fund’s interest is higher than 5%. The funds have thus become TPSA’s second largest shareholder after France Telecom. Capital Research and Management is one of the world’s leading investment organizations, with assets under management exceeding 1 billion dollars. Investors will probably react positively to such an investor taking positions in TPSA, although, in a similar situation in the past, Netia’s stock did not rally at all, held down by a weak earnings performance and the fact that the investor stopped buying its shares at some point. Will UKE be allowed to divide TPSA? The European Commission believes that the prices of Internet access are still too high in Poland, and considers giving regulators more authority to bring rates down. One way to do this is to divide the dominant operator. The Commission might put forth a proposal to this effect in

BRE Bank Securities

1 August 2007 33


October, when it releases new draft regulations for the telecom market and a new catalog of measures that local regulators can use to improve competition. The Commission’s proposals could enter into force in two-three years. Such “measures” do not have to consist in establishing separate operations. For starters, the UOKiK could decide to separate the service division from the network division. We are skeptical about the Commission's stance. To divide TPSA would be a big challenge given that it was sold by the government through a share offering, and, if it was reclaimed by the state, its value would plummet. The UKE's Head Ms. Anna Streżyńska said in an interview that if the European Commission implements regulations allowing for a division of the national operator into a wholesale part and retail part, she will do everything to make sure that such a split takes place. Italians to divide TI Italy's telecommunications regulator AGCOM wants to have Telecom Italia divided into separate Retail and Wholesale operations by the end of the year. A successful division of a listed telecom operator could pave the way for the UKE to do the same. WP is the next MVNO Wirtualna Polska.pl and PTK Centertel (both subsidiaries of TPSA) made a deal under which WP.pl will launch MVNO operations. The services will be launched in the summer, under the name of WPmobi. As MVNO, WP.pl has an ambition to acquire at least 250,000 customers within three years, and break even in 2008. Since WP.pl is a 100% subsidiary of TPSA, we consider WPmobi a part of the operator’s mobile telephony business. It will operate on the same basis as PTC’s Heyah. We expect WP.pl’s main rivals Onet.pl and Interia.pl to reiterate soon with similar plans.

BRE Bank Securities

1 August 2007 34


Media Murdoch lures popular TV reporters According to Dziennik, TV Plus executives are talking to the popular TVN 24 reporter Patrycja Redo about joining TV Puls’s news team. The station, purchased recently by Rupert Murdoch, is also negotiating with TVN24’s editor Tomasz Sandak. This is a foretaste of what we can expect of the TV industry in the next two years. TV Puls to change name to “Fox” After a takeover a few months ago by the media mogul Robert Murdoch, TV Puls is building its market position. Soon, it is going to change its name to “Fox,” a brand recognized across the globe. It is also going to receive new transmitters. We predicted this scenario months ago. TV Puls’s growth is bad news for TVN. Many investors still do not appreciate the threat coming from News Corp. We are looking forward to Round One after the summer holidays, as TV Puls is preparing new content and a marketing campaign. TVN teams up with CNBC Challenging the rival TV Biznes run by Polsat, TVN teamed up with CNBC Europe to launch a business channel (probably in October) under the name of “TVN CNBC Biznes.” TVN will share resources with CNBC (including its reporter stands at the world’s stock exchanges), and prepare reports from the Warsaw trading floor for CNBC Europe. TVN did not reveal how much the channel will cost, but it is expected to break even after two years from launch. TVN CNBC Biznes has broadcasting guarantees from cable networks and three digital platforms, through which it will reach 2-2.5 million viewers. TVN 24 scored its highest ratings in history on July 9th, and its market share currently stands at 6.64% according to an AGB Nielsen Media Research survey. TVN CNBC Biznes is a good move, but the main station, TVN, is preparing to be challenged by the “new, improved” fall programming of its rivals. Time will show how strong TVN really is. As for the new channel, its impact will be negligible for three years, after which it might cannibalize TVN24’s audience. Ratings up, revenues down The combined audience share of all of TVN’s channels increased to 20.9% in June from 19.0% a year earlier. The combined prime time audience share climbed to 23.3% from 20.9%. The audience of the core TVN station rose 0.7ppts to 15.7%. As far as advertising revenues are concerned, Polsat was June’s leader with PLN 188.1m (up 11% y/y), followed by TVN with PLN 173.6m (down 7.8% y/y). TVN has clearly rebounded from the recent slump in audience share. As for the ad revenue figures, they are reported net of discounts, and are therefore not fully reliable. Outdoor market in H1 According to the outdoor advertising association IGRZ, corporations spent PLN 286 million on billboard ads in the first half of the year, over 10% more than a year ago. Expenditure was up 13% in the second quarter. The most active advertisers included mobile telephony operators, retailers, car producers, and clothing and shoe producers, and - a new addition - cosmetic firms. The outdoor data is better than expected. We had assumed in our forecasts that AMS’s FQ2 advertising revenues would be up 5%. The full-year performance will depend on whether the government decides to hold early parliamentary elections. If yes, outdoor’s growth will no doubt exceed the 12% currently forecasted.

BRE Bank Securities

1 August 2007 35



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 133.7 1 147.7 1.2% 1 212.8 5.7% 1 267.0 4.5% Number of shares (m) 56.8EBITDA 116.5 152.4 30.8% 175.9 15.4% 189.2 7.6% MC (current price) 2 491.7EBITDA margin 10.3% 13.3% 14.5% 14.9% EV (current price) 2 192.7EBIT 39.6 78.7 98.8% 103.8 31.8% 118.4 14.1% Free float 37.0%Net profit 32.0 68.6 114.4% 89.4 30.4% 102.2 14.3%

P/E 75.4 35.2 27.0 23.6 Price change: 1 month 4.2%P/CE 22.2 17.0 14.9 13.9 Price change: 6 month 13.8%P/BV 2.1 2.2 2.1 2.1 Price change: 12 month 18.7%EV/EBITDA 18.2 14.9 12.7 11.7 Max (52 w eek) 49.5Dyield (%) 1.1 3.1 2.8 3.7 Min (52 w eek) 27.7

Agora (Accumulate)Current price: PLN 43.9 Target price: PLN 47.6

15

25

35

45

55

65

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Agora WIG

Agora’s shareholders worry about increased competition from a new broadsheet (Polskapresse) and the ad market’s weakness on the one hand, and, on the other hand, they are eager to learn who is going to replace Wanda Rapaczyńska as the company’s new CEO. We expect sentiment to stay buoyant after the FQ2 earnings announcement as Agora shows positive effects of cost cuts and stronger book sales. An early election in the fall would give an additional boost to earnings. CEO change The likeliest candidate to replace Wanda Rapaczyńska as Agora's CEO is Marek Sowa. The shareholders will vote on August 30th. Mr. Sowa (45) has been vice-president of UPC Polska for the last seven years, serves on the supervisory boards of Canal+ and PTC, is President of the Polish Union of Private Media Employers, and sits on the management board of PKPP Lewiatan. Those who were hoping to see someone with international media experience take over the lead are in for a disappointment, especially in light of UPC’s less-than-stellar achievements. Those who feared that the CEO job will be given to an insider will be pleased. We are not going to judge Mr. Sowa until we learn his plans (we assume that the shareholder vote is a formality: Agora Holding, which proposed this candidate, has a 36% shareholding interest). New daily The title of the new national daily being readied by Polskapresse will probably be Wiadomości 24 the same as the name of the publisher’s news portal. This information explains Polskapresse’s recent investments in the online paper. While we will wait to review the new daily until after it is actually launched, given Poland’s readership numbers, the chances for success seem slim. Gazeta Wyborcza’s ad revenues (excl. discounts) According to data compiled by Expert Monitor, Gazeta Wyborcza’s first-half ad revenues increased by PLN 37.24m to PLN 483.32m. Rzeczpospolita was second with PLN 88.76m (up PLN 2.98m on a year ago), and Fakt was third with PLN 81.34m (down PLN 18.55m). In the fourth place is Dziennik with PLN 68.82m. The Export Monitor numbers do not include discounts, which can be as high as 50% in the print media market, depending on the title, that is why a reliable assessment of the actual ad revenue growth is impossible. But if the trends emerging from this data are confirmed, this would be great news from Agora’s standpoint. Axel Springer is obviously still struggling with how to translate its readership success into cash.

BRE Bank Securities

1 August 2007 36


9

11

13

15

17

2006-07-25 2006-11-14 2007-03-07 2007-07-02

WSiP WIG


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 266.4 253.1 -5.0% 253.1 0.0% 255.7 1.0% Number of shares (m) 31.3EBITDA 30.7 37.3 21.5% 42.1 12.7% 43.2 2.7% MC (current price) 495.0EBITDA margin 11.5% 14.7% 16.6% 16.9% EV (current price) 380.7EBIT 23.2 30.4 31.0% 35.1 15.6% 36.2 3.2% Free float 100.0%Net profit 20.1 28.9 44.2% 33.1 14.2% 34.1 3.1%


WSiP (Buy)Current price: PLN 15.8 Target price: PLN 18.1

After a change of management, WSiP underwent a major restructuring which included staff downsizing, administrative cost cuts, and internal reorganization. Amidst a lackluster market, better efficiency was the key determinant of the company’s value. The results of the new management’s initiatives will be noticeable in this year’s standalone earnings figures (official net profit guidance: PLN 28-29m). WSiP is looking forward to the new law set to enter into force this year, regulating textbook purchases by schools, expected to facilitate further cutbacks in sales costs which will offset future salary increases. Restructuring is currently underway at WSiP’s subsidiaries which depressed the FY2006 standalone net profit by close to PLN 8m. We predict that subsidiary earnings will hover around zero this year, and add from PLN 2m to PLN 4m to the bottom line next year. In our opinion, a PLN 30m net profit is a reasonable estimate for the next fiscal year, with the implied P/E ratio at the current price level at 12.7 - a level that investors should find attractive. WSiP’s operating income allows the company to distribute 100% of its annual earnings to shareholders, implying a gross yield of 7.5%. In either FY2007 or FY2008, the bottom line will probably receive a big boost after the company reverses a PLN 20 million (minimum) allowance recognized against possible claims concerning a dispute over a tenement house in Warsaw. We are reiterating a buy rating on WSiP. New laws expected to change the face of the book market According to the new law, schools will select textbooks for three-year instead of one-year periods. What this means for WSiP is that the orders it receives this year will remain in effect for the next three publishing seasons, facilitating significant scale-backs in marketing and sales campaigns. Another benefit of the new regulations will be an acceleration in industry consolidation. Small publishers unable to garner enough orders could face three weak sales years, finding themselves in a financial “pickle,” and become more willing to “give themselves away” to stronger players. WSiP can use its PLN 80m free cash flows to make acquisitions. In our valuation of the company, we did not factor any M&A activity in for now.

BRE Bank Securities

1 August 2007 37


IT Sector Public administration is promising more IT contracts in the near future. The Interior Ministry has plans to hold sixteen tenders with a total value of PLN 2 billion in the third and fourth quarters. The Ministry of Education revealed a short list of bidders for school computer contracts in July (estimated at PLN 272m). In less pleasant news, the Public Procurement Office canceled a major IT tender for the Boarder Guard Service, leading to annulment of two other contracts, all of which were estimated at PLN 200m. Gov’t sets aside PLN 2.6bn for computerization Deputy Interior Minister Grzegorz Bliźniuk announced that PLN 2.6bn had been set aside in the government budget for large information technology projects scheduled for the years 2007-2010. Sixteen of those projects, estimated at a total PLN 2.2bn, are set to start in the third and fourth quarter of this year. MEN shortlists suppliers The Ministry of Education (MEN) made a short list of bidders vying for contracts to supply 5.9 thousand schools with computers. The value of the tender is PLN 272m. The short list includes Comarch (in consortium with Ogólnopolska Fundacja Edukacji Komputerowej (OFEK), offering NTT hardware), Asseco Poland (in consortium with Incom, offering Incom hardware), ABG Ster-Projekt (in consortium with Integrit, offering Incom hardware), and Sygnity (Action hardware). Border Guard Service annuls contract tender The Public Procurement Office (UZP) annulled a hardware contract competition for the Border Guard Service. Apparently, the terms of reference were too obviously biased in favor of IBM and Cisco. The annulment brought about a cancellation of two further tenders, one for a connectivity service provider, and one for data communications, network, and telephone devices, totaling PLN 200m.

BRE Bank Securities

1 August 2007 38


Analyst: Piotr JanikLast Recommendation: 2007-01-08

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 262.0 379.1 44.7% 404.9 6.8% 441.7 9.1% Number of shares (m) 64.4EBITDA 31.0 37.0 19.3% 43.6 17.7% 53.1 21.7% MC (current price) 478.8EBITDA margin 11.8% 9.8% 10.8% 12.0% EV (current price) 388.2EBIT 25.8 31.4 21.7% 37.2 18.6% 46.7 25.6% Free float 43.7%Net profit 25.1 27.4 9.3% 32.6 18.9% 40.9 25.6%

P/E 47.1 19.9 14.0 11.7 Price change: 1 month -2.9%P/CE 31.0 15.0 11.2 9.7 Price change: 6 month -11.4%P/BV 2.4 1.5 1.4 1.3 Price change: 12 month -12.1%EV/EBITDA 24.1 10.8 7.9 6.3 Max (52 w eek) 8.7Dyield (%) 0.9 1.1 1.5 2.1 Min (52 w eek) 6.7

ABG Spin (Hold)Current price: PLN 7.4 Target price: PLN 7.87

5

7

9

11

13

2006-07-25 2006-11-14 2007-03-07 2007-07-02

ABG Ster-Projekt WIG

The merger between ABG Ster-Projekt and Spin is official, and its product is a new company operating under the name of “ABG SPIN.” Prokom Software holds a 42.7% stake in it (before the merger, Prokom had a 29.7% interest in ABG Ster-Projekt). ABG SPIN has already landed a PLN 7.6m contract from “Zakład Energetyczny Okręgu Radomsko-Kieleckiego”, and another one from Oracle Poland (a three-year deal with an estimated value of PLN 16.5m), as well as a job from the NATO investment management office ZIOTP in Warsaw. In the near term, the company’s earnings are going to be affected by the scarcity of public administration orders which are expected to pick up around the fourth quarter. ABG Ster-Projekt/ SPIN merger official The new company will operate under the name of “ABG SPIN S.A.” In an assets-for-stock transaction, ABG Ster-Projekt will place its shares to SPIN’s shareholders at an exchange ratio of 4.41 shares of ABG Ster-Projekt’s new “K” stock for one share of SPIN. A relevant court approved ABG Ster-Projekt’s equity raise by PLN 24.3m through an issue of 24.3 million “K” shares with a par value of PLN 1. Prokom Software increases ownership After acquiring 3.3 million shares of ABG Ster-Projekt’s new “I” stock, Prokom Software’s ownership interest increased to 28.1 million shares representing 29.7% of equity and votes. Prokom is also going to take up the “K” shares that ABG Ster-Projekt placed to SPIN’s shareholders, increasing its ownership interest to ca. 40.4 million shares, i.e. 42.7% of equity and votes. Contracts in July ABG SPIN won a contract from Zakład Energetyczny Okręgu Radomsko-Kieleckiego for a data processing center and a backup server farm, adaptations in existing buildings, and computer hardware and network infrastructure. The PLN 7.6m contract has a deadline in March 2008. Another of ABG SPIN’s July contracts was an assignment from Oracle Polska for maintenance and upgrades of the Oracle E-Business Suite used by the Agency for Agricultural Restructuring and Modernization (ARiMR). The three-year contract has a maximum value of PLN 16.5m (net). A consortium of ABG SPIN and Telsla Elektronik (Ankara) signed an agreement with "Zakład Inwestycji i Organizacji Traktatu Północnoatlantyckiego,” a body managing Poland’s NATO investments. The agreement covers computer hardware, phone cables, and audio and video equipment for the Joint Force Training Center in Bydgoszcz. The contract value is PLN 60.8m. The deadline is 180 days from the date the consortium is given access to the premises, which, in turn, should take place within 30 of execution of the agreement. This is another NATO deal for ABG SPIN after a contract from NATO-NAMSA signed at the end of June.

* FY2006 earnings adjusted for real-estate sale (PLN 8m) and reversal of a tax allowance (PLN 6m), FY2007-FY2008 multiples estimated based on pro-forma financial statements of the merged Spin and ABG Ster-Projekt

BRE Bank Securities

1 August 2007 39



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 501.2 1 227.6 144.9% 1 308.6 6.6% 1 393.4 6.5% Number of shares (m) 25.2EBITDA 64.2 168.0 161.6% 184.0 9.5% 193.2 5.0% MC (current price) 2 112.2EBITDA margin 12.8% 13.7% 14.1% 13.9% EV (current price) 2 032.1EBIT 50.2 139.0 177.1% 154.2 11.0% 163.7 6.1% Free float 65.7%Net profit 64.5 114.6 77.7% 127.8 11.6% 136.5 6.8%


Asseco Poland (Under Review)Current price: PLN 83.9 Target price: -

25

35

45

55

65

75

85

95

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Asseco Poland WIG

August will be a period of continued strategy implementation for Asseco Poland. Its Slovakian subsidiary Asseco Slovakia acquired a 51% stake in MPI Slovakia (the price will fall in a range of SKK 10m-20m). Asseco Poland set up another foreign subsidiary, Asseco Adria, which will be charged with managing acquisitions, among others, in Croatia and Serbia. Asseco Business Solutions, a product of a merger between three ERP developers and an e-learning company completed in June, has filed a prospectus with the Commission for Financial Supervision (KNF), and hopes to float its shares on the Warsaw Stock Exchange in late Q3/early Q4. Asseco Poland’s strategy is centered around acquisitions of local IT firms which are then integrated into subsidiaries tasked with expansion in their respective regions (e.g. Asseco Adria and Asseco Romania), and floated on the WSE. Aside from Asseco Business Solutions, another Asseco IPO planned for this year is Asseco Systems. Another acquisition Asseco Slovakia signed an agreement to acquire a 51% stake in MPI Slovakia. Depending on MPI Slovakia’s net profit for FY2007, the cost of the takeover will range from SKK 10.0m and SKK 20.0m. Financing will be provided by the capital raised through Asseco Slovakia’s 2006 stock offering. MPI Slovakia is a small provider of SAP R/3 rollout solutions. Its sales in FY2006 amounted to SKK 35m, and the bottom line was SKK 3.5m. Asseco Adria Asseco incorporated a subsidiary Asseco Adria S.A. to manage future acquisitions and provide IT services. On Asseco Adria’s schedule for this year are two acquisitions in Skopje and Belgrade, with combined FY2006 revenues of EUR 16.1m, and a net profit of EUR 3.0m. Asseco Poland owns 93% of Asseco Slovakia. Asseco Business Solutions submits prospectus for IPO Asseco Business Solutions filed its prospectus with the Polish Financial Supervision Authority for an IPO slated for late Q3 / early Q4. Asseco Business Solutions is a product of the merger between three ERP developers (Safo, SoftLab, WA-PRO) and the IT outsourcer and e-learning provider Incenti. It hopes to raise PLN 70m with the IPO, most of which will be allocated to ERP firm acquisitions.

* FY2006 multiples based on earnings adjusted for Asseco Poland stock options (PLN 3.9m), divestment of Mediabank (PLN 4.1m), goodwill write-off on S2Koma (PLN 4.8m), and net profit of the “old” Asseco Poland accounted for by the equity method (PLN 12m), FY2007-FY2008 multiples estimated based on pro-forma consolidated financial statements of the “new” Asseco Poland, including subsidiary earnings consolidated on a pro-rata basis

BRE Bank Securities

1 August 2007 40



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 455.0 579.0 27.3% 675.7 16.7% 753.5 11.5% Number of shares (m) 7.5EBITDA 57.6 76.5 32.9% 95.0 24.2% 110.0 15.7% MC (current price) 1 503.8EBITDA margin 12.7% 13.2% 14.1% 14.6% EV (current price) 1 474.7EBIT 45.5 63.7 40.0% 81.1 27.3% 95.7 18.0% Free float 56.9%Net profit 50.0 63.7 27.5% 81.7 28.2% 92.8 13.5%


ComArch (Reduce)Current price: PLN 200 Target price: PLN 185.8

110

140

170

200

230

260

2006-07-25 2006-11-14 2007-03-07 2007-07-02

ComArch WIG

Comarch’s management predict a 20% increase in sales revenues this year, and set the full-year EBIT margin target at 8% minimum. In July, the company won a contract to implement the first stage of the public administration’s e-PUAP project. We expect public sector contracts to be a major factor influencing Comarch’s earnings this year. Major projects are set to be launched in the third and fourth quarter of this year. Revenues to increase by over 20% in FY2007 According to ComArch’s CEO, revenues in FY2007 will increase by over 20%, and the EBIT margin will be at least 8%. The CEO is worried about the growing salary pressure: salaries are expected to increase over 10% this year. Stage One of e-PUAP awarded to ComArch ComArch won a contract from the Interior Ministry for completion of the first stage of Poland’s Electronic Public Administration Platform (e-PUAP) for a gross PLN 13.77m. The deadline of the first stage is May 31st, 2008.

* multiples estimated based on earnings adjusted for a deferred tax asset, gains from sale of Interia shares, and profits of subsidiaries accounted for by the equity method (Interia)

BRE Bank Securities

1 August 2007 41


20

30

40

50

60

70

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Macrologic WIG




Macrologic (Buy)Current price: PLN 51.8 Target price: PLN 58.43

Instead of the originally planned share buyback, Macrologic decided to hold a tender offer for its outstanding shares. After a period of internal consolidation, the group is starting to see cost and revenue synergies, and its earnings are also benefited by ERP system upgrades necessitated by new regulations. Tender offer Macrologic will hold a tender offer for its outstanding shares by September 30th at the latest. The offer will be for up to 0.1 million shares (5.3% of all shares outstanding), at PLN 56.6 apiece. The stock bought back will be offered as incentives to Macrologic’s key employees. To date, due to low liquidity, Macrologic has bought back approximately 45,000 shares of its treasury stock for a combined PLN 2.3m. The budget of the buyback program ended on July 15th was PLN 3.7m. This time, there will be a tender offer instead of the buyback.

BRE Bank Securities

1 August 2007 42




P/E 27.0 19.5 16.4 15.0 Price change: 1 month 4.0%P/CE 19.7 14.3 12.5 11.7 Price change: 6 month -5.1%P/BV 1.7 1.5 1.3 1.2 Price change: 12 month 5.8%EV/EBITDA 17.1 11.1 8.9 7.5 Max (52 w eek) 176.0Dyield (%) 0.9 0.7 1.2 1.4 Min (52 w eek) 119.2

Prokom Software (Hold)Current price: PLN 156.4 Target price: PLN 150.3

By acquiring Comp S.A.’s newly issued shares, Prokom Software increased ownership in the company to 33%. Prokom is feeling the impact of the persistent shortage in public administration contracts, and its earnings are further hurt by the seasonality of revenues generated by key accounts. Once government orders pick up, Prokom will have good exposure to many of those deals. Major projects are set to be launched in the third and fourth quarter of this year. Prokom increases ownership interests in Comp The court registered Comp S.A.’s equity raise through an offering of 607,000 shares. In a private placement, Prokom Software acquired 555,000 of the new shares in consideration of shares in Safe Computing and a license to produce “Nefryt” encoders. As a result of this purchase, Prokom’s ownership interest in Comp is now 32.96%. Novitus speeds up CSS divestment Novitus is going to sell its entire stake in CSS in the next few weeks. Novitus paid PLN 30.7m for these shares, financed with a loan from BRE Bank. The actual sale date will depend on when the court lifts the lien made on the CSS shares. The original plan was to wait with the sale until CSS is officially merged with Comp, but Novitus decided that it was time to streamline its organizational ties: Novitus has a 30% voting interest in CSS, while Comp is Novitus’s strategic investor (with a 45.74% stake).

90

115

140

165

190

215

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Prokom Software WIG

* multiples estimated based subsidiary earnings consolidated on a pro-rata basis (Asseco Poland, ABG Ster-Projekt, Spin)

BRE Bank Securities

1 August 2007 43



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 814.4 1 315.4 61.5% 1 394.2 6.0% 1 476.2 5.9% Number of shares (m) 6.9EBITDA 39.6 116.6 194.4% 145.9 25.1% 163.1 11.8% MC (current price) 520.0EBITDA margin 4.9% 8.9% 10.5% 11.0% EV (current price) 424.9EBIT 17.3 85.0 390.7% 113.6 33.6% 130.1 14.6% Free float 79.9%Net profit 2.8 65.2 2234.3% 88.7 36.1% 104.0 17.2%

P/E 215.4 12.3 9.0 7.7 Price change: 1 month -8.2%P/CE 24.0 8.3 6.6 5.8 Price change: 6 month -33.8%P/BV 1.9 1.1 1.0 0.9 Price change: 12 month -18.8%EV/EBITDA 16.1 7.0 5.2 4.4 Max (52 w eek) 123.5Dyield (%) 1.3 1.3 1.3 1.3 Min (52 w eek) 70.1

Sygnity (Under Review)Current price: PLN 75.4 Target price: -

50

76

102

128

154

180

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Sygnity WIG

Sygnity underwent a management reshuffle in July, when CEO Michał Danielewski was replaced by Piotr Kardach (former vice-president of the management board). The new CEO announced major restructuring changes aimed at improving profitability in FY2008. Sygnity garnered a total PLN 37m-worth of contracts in July. New CEO Sygnity’s supervisory board replaced CEO Michał Danielewski with Piotr Kardach, former vice president and CEO of Emax. The new CEO announced major restructuring changes aimed at improving profitability. The restructuring will include:

1. A new management approach; Mr. Kardach wants to scale back the operational functions assigned to the management board by delegating them to lower-level management, and sharpen focus on strategic initiatives.

2. Swift completion of the merger between Computerland and Emax and achievement of cost and revenue synergies.

3. Improved incentive mechanisms to shift away from discretionary rewards. Delegation of duties is a part of the new approach to motivating employees.

4. Restructuring of the core business aimed at achieving better effectiveness and cutting costs as deep as possible through discontinuation of unprofitable product lines and redundant production units (e.g. catering to energy customers), and tight control over purchases.

5. Staff downsizing, which the new CEO says is unavoidable. To facilitate effective reductions, Sygnity is going to implement an IBM HR management system which will allow it to assess resource utilization and identify areas which can be downsized. In addition, there will be a revision of employee functions. While this might slow down operations this year, the CEO considers it necessary to achieve the profitability target.

6. New management board appointments, Messrs Andrzej Marciniak and Jacek Kujawa. Andrzej Marciniak has experience in corporate turnarounds. He has held management positions at such companies as Przedsiębiorstwo Leasingowe Uniservice RENT S.A., ZPO Vistula S.A., AVC Sp. z o.o., and BB Investments companies (Dom Maklerski BMT S.A., BMT Leasing S.A.), and served on the supervisory boards of, among others, ENEA group, later to become the group’s CEO. Jacek Kujawa is Sygnity’s former sales manager in charge of bank and finance customers, which the CEO finds to be the company’s strongest line of business. Earlier, Mr. Kujawa was CEO of Polsoft and supervisory board member at ZETO-RODAN, PB Polsoft, Support, and CL Serwis.

Contracts in July Sygnity won an IT infrastructure contract from a manufacturer, with a price of PLN 6.6m net, and an automated banking system contract from a finance organization worth approximately PLN 11m net. The contracts cover a period from 2007 to 2009. The company did not reveal any further details. Another contract was from the National Health Fund (NFZ), covering maintenance, consulting, and control of Sygnity’s proprietary system developed specifically for this customer. The contract has a gross value of PLN 15.7m, and expires at the end of the year. At the beginning of July, Sygnity landed an ERP rollout deal from the Polish Committee for Standardization, with a deadline in February 2008, for PLN 4.1m.

**** FY2007-FY2008 multiples estimated based on pro-forma financial statements of the merged ComputerLand and Emax

BRE Bank Securities

1 August 2007 44





Techmex (Under Review)Current price: PLN 41.5 Target price: -

With no government orders in sight, and after the dismissal of the Head of the Agency for Agricultural Restructuring and Modernization (ARiMR), Techmex’s key GIS customer, the company can only wait for a spending revival in public administration (expected to start around the fourth quarter), and installation of a new President at the ARiMR. Karen Notebook’s share offering On July 31st, Karen Notebook’s shareholders voted in favor of a cum-rights private placement of 40 million shares to existing shareholders. One “old” share will entitle its holder to purchase three “new” shares. The shares will be offered at their par value of PLN 1 apiece. Techmex, owner of a 63% stake in Karen Notebook, assured that it was going to vote in favor of the placement. Karen Notebook will use the gains from the SPO to expand its sales network (from 110 to 150 stores by the end of the year), open an online store, and possible acquisitions of small IT firms that can enlarge its product range. The company is intent on making at least one such acquisition in 2007.

10

15

20

25

30

35

40

45

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Techmex WIG

* multiples estimated based on subsidiary Karen Notebook’s earnings consolidated on a pro-rata basis

BRE Bank Securities

1 August 2007 45


Metals Copper market According to the latest ICSG report, there was a 90,000 ton excess of demand over supply again in April (or 45,000 adjusted for seasonal factors). The YTD supply deficit was 265,000 tons, or 155,000 tons adjusted. The ICSG report does not factor in China’s State Reserve Bu-reau which, as demand data suggests, is probably in the process of rebuilding the inventories depleted last year. In the period from January to April, global demand for copper increased 10.5%, with China recording a 38% surge from the same period a year earlier, compared to other countries where demand rose 3%. The market’s main driving forces are India (+17%) and Russia (+11%). Demand from the EU edged up 0.8%, and Japan and the USA recorded 3.8% and 3% respective declines. As far as supply goes, mining output in the first four months of the year was up 7%, and smelter output rose 5%. This demand/supply pattern led to a depletion in inventories, and this while some investors expected a 100-250kt excess of supply over demand in 2007. In July, inventories held by leading exchanges (LME, COMEX, SHF) fell by 13,800 tons, most notably in Europe and the USA. After an initial decline, stockpiles rebounded in the second half of the year. We should keep in mind that, historically, global demand for copper slows down in the summer season, and goes back up in mid-September through November. And this period of heightened demand will determine whether copper is going to stay at the current high level – a scenario that analysts do not consider in their projections.

Copper inventories: LME, Comex and Shanghai; geographic distribution of LME

0,0

50,0

100,0

150,0

200,0

250,0

300,0

2004-12-30 2005-08-30 2006-04-30 2006-12-30

ty s. ton

LMEComexShanghay

60

110

160

210

260

2004-12-30 2005-08-05 2006-03-02 2006-09-28 2007-04-26

ty s. ton

2800

3800

4800

5800

6800

7800

8800USD/t

Zapasy łacznieCena (spot)

Source: Bloomberg, ICSG

'000 tons

Shanghai

'000 tons

Total inventories Spot price

BRE Bank Securities

1 August 2007 46





Kęty (Reduce)Current price: PLN 201.9 Target price: PLN 187.5

90

120

150

180

210

240

270

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Kęty WIG

Kęty’s second-quarter earnings performance was a disappointment. Looking at the first-half financials, we concluded that the company will not be able to meet our expectations, and lowered our full-year net profit forecast from PLN 120m to PLN 104m. After having made huge investments in plant and equipment and acquisitions, and despite a strong momentum in the building industry, the bottom line is a meager 18% higher than re-corded in FY2005. We are reiterating a reduce rating on Kęty, with a new price target of PLN 187.5. FQ2’07 earnings overview On revenues of PLN 320.7m, Kęty generated PLN 41.6m in EBITDA and PLN 21m in net profit in FQ2 2007 vis-a-vis PLN 251.4m; PLN 52.6m, and PLN 34.3m in FQ2 2006. According to the management, this year’s bottom line displayed a decline due to recognition in FQ2’06 of a com-pensation for fire damages (PLN 19.8m), which boosted the quarter’s the EBITDA and net profit (PLN 16m). Adjusted for this compensation, Kęty’s consolidated net profit for this year’s second quarter is 15% higher than last year. But, even adjusted for this one-off, year-over-year comparability is affected as after the fire damaged the flexible packaging capacity, FPS’s sales decreased to PLN 52m (down 3.7% y/y), and the EBIT margin fell to 2%. If we assumed that the plan was producing at normal capacity, sales would have approximated PLN 59m, which, at regular margins, would produce an EBIT of PLN 6.5m, meaning that the FQ2 2006 base is ca. PLN 5.4m short. A year-on-year comparison against adjusted FQ2'06 figures showed an 28% increase in reve-nues, a 8.9% increase in EBITDA, and a 6% reduction in net profit. Because the adjustments can have a margin of error, we decided to compare the FQ2’07 earnings figures with those gen-erated two years earlier, in FQ2 2005, with the result that on a 88% revenue increase, there was a 10.3% increase in EBITDA, and a 24.5% reduction in net profit. We should note that the FQ2’05 results did not yet include Kęty’s subsidiaries Aluprof and Złotów. Złotów has been in-corporated in the consolidated statements since mid-April of this year (2.5 months-worth of earnings shown in the FQ2’07 report), affecting year-on-year comparability even more (Złotów’s contribution to the consolidated EBITDA for FQ2 2007 amounted to PLN 1m). Adjusted for this subsidiary, the EBITDA edged up a mere 6.3% relative to the adjusted EBITDA for FQ2 2006.

BRE Bank Securities

1 August 2007 47



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 11 669.7 11 645.1 -0.2% 11 658.8 0.1% 9 583.7 -17.8% Number of shares (m) 200.0EBITDA 4 545.5 4 768.0 4.9% 5 080.7 6.6% 3 568.6 -29.8% MC (current price) 25 280.0EBITDA margin 39.0% 40.9% 43.6% 37.2% EV (current price) 26 695.0EBIT 4 201.2 4 387.7 4.4% 4 645.4 5.9% 3 078.3 -33.7% Free float 36.0%Net profit 3 395.1 3 970.9 17.0% 4 135.3 4.1% 2 935.2 -29.0%


KGHM (Hold)Current price: PLN 126.4 Target price: PLN 119

65

80

95

110

125

140

155

170

2006-07-25 2006-11-14 2007-03-07 2007-07-02

KGHM WIG

Copper prices stay within the range of $7.5-8 thousand per ton, well above the average forecast for this year ($7,200/t). We expect a rebuilding of inventories during the seasonally weaker demand. Whether prices stay high, forcing analysts to revise their valuation models and raise forecasts, will depend on the supply/demand balance in the period from September through November. The market is supported by the SRB’s inventory rebuilding after heavy sales in 2006. We leave our forecasts and target on KGHM intact for now, with the reservation that we consider them conservative in light of the current macroeconomic situation, but with the investment rating downgraded to HOLD after the recent rally on the stock. If copper breaches its all-time high of $8,400/t, there will be rapid selling of short positions, with the price moving even further north to $9,000/t. In this scenario, KGHM’s stock would soar in the vicinity of PLN 140 / share. New earnings guidance slated for August KGHM promised that the new FY2007 earnings guidance would be ready in August. The old net profit target is ca. PLN 3bn. KGHM’s second-quarter earnings release is set for August 6th. This is in line with our expectations. We raised our net profit estimate for KGHM to PLN 4bn in the latest Research Update, which is a conservative assumption in today’s market. The management’s old forecast is based on the assumption that the average annual price of copper will hover around $5,700/t. KGHM waits for a preliminary valuation of PAK KGHM’s management probably completed a preliminary valuation of PAK in July as a basis to negotiate acquisition of a 40% stake in the power plant with Elektrim. Investors will not be happy if KGHM decides to take over the PAK stake (such an acquisition would necessitate large capex, i.e. lower CFs for shareholders). We will not venture to assess this deal until we gain insight into its terms (price, other). In our opinion, PAK is a potentially profitable asset that would add diversity to KGHM’s business (reduced seasonality). In other news, KGHM’s shareholders corrected a mistake in their resolution regarding distribution of the FY2006 profit (PLN 3.394bn, PLN 16.97/share, to be paid out as dividends to shareholders), without changing the date of record and payment.

BRE Bank Securities

1 August 2007 48


20

30

40

50

60

70

80

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Koelner WIG


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 411.8 590.9 43.5% 734.3 24.3% 932.6 27.0% Number of shares (m) 30.3EBITDA 71.1 107.4 51.2% 127.6 18.8% 155.6 21.9% MC (current price) 1 924.8EBITDA margin 17.3% 18.2% 17.4% 16.7% EV (current price) 2 016.1EBIT 54.3 78.3 44.4% 91.8 17.2% 117.7 28.2% Free float 37.0%Net profit 40.5 61.9 52.8% 74.8 20.9% 98.0 31.1%


Koelner (Reduce)Current price: PLN 63.5 Target price: PLN 53.72

Looking at our price target (PLN 53.72) and the estimated value of Koelner’s German acquisition (ca. PLN 2 / share), we think that, even after the recent reduction, the stock is overpriced and advise investors to reduce. The stock could get a small boost after an official confirmation of the merger with Śrubex, but this will probably not happen in August. We do not expect to be wowed by Koelner’s FQ2 results as we expect to see higher costs incurred on warehouse enlargements and zero tax credits (as the company lags behind with setting up a special economic zone). Koelner/Śrubex merger plan slated for August The managements of both firms will develop a merger plan and announce it by the end of August. The plan will be based on the earnings generated in the first half of 2006. A merger plan is not tantamount to an actual merger, which needs approval by two-thirds of Śrubex’s shareholders. All now depends on the share exchange ratio and on whether Śrubex’s owners can be convinced that the merger is a good idea.

BRE Bank Securities

1 August 2007 49


Construction Cement supply problems Cement is still in short supply. According to Puls Biznesu, a one-week cap will be put on cement purchases, meaning that buyers can only purchase one week’s worth of cement at a time. The aim is to ensure continuity of deliveries. The industry’s cement output in 2007 is estimated at 17 million tons at a capacity of 18-19 million tons. Until more capacity is added in 2-3 years, any supply gaps will have to be filled with imports. The cement shortage took its toll on construction output growth in May, which fell to 16.3% y/y. The warm months ahead might witness a further increase in cement prices, and supply problems, but we expect the situation to be contained in six months’ time. Large players have easier access to cement than small players. Even though expensive cement will drive building costs, the scale of this price hike will not be significant enough to prompt a forecast revision. Construction output down again According to the GUS, year-over-year construction output growth plunged to 3.7% in June from 16.3% in May. At the end of June, YTD output surged 30.2% on the same period a year earlier. June’s seasonally adjusted y/y growth was 9.9%. The adjusted growth figures indicate that the plunge in construction output can be attributed to seasonal factors. May’s adjusted growth rate was 18.9% y/y. A month-on-month comparison also shows a decline. June’s seasonally adjusted output was 1.4% lower than May’s, and May’s was 1.5% lower than April’s. The reasons behind this slowdown probably lie in the supply department (labor, materials shortage), showing that the building industry is working at full capacity, and growth can only be pushed forward by importing workers (e.g. from behind our eastern borders), or investing in capacity. But such investments will not increase without margin incentives. We expect a rally in the prices of building services, driving the profit margins of builders. For now, however, we do not feel compelled to revise our earnings forecasts for the firms in our coverage universe. Energomontaż Południe: Real estate projects going as planned Energomontaż-Południe reports that the work on a housing/commercial complex in Wrocław is going according to plan. The apartments will be ready to move in by the end of September. The office space will be completed in the first quarter of 2008. Prospective tenants have declared interest in renting 15,000 square meters, almost twice the actual space available (8,8000 sqm). The apartment sales will boost the consolidated FY2007 profits. Energomontaż-Południe was scheduled to revise its full-year guidance by the end of July. The guidance currently in place pegs sales revenues at PLN 212m, and the pre-tax profit at PLN 19m. Instal Kraków: A PLN 6m deal Instal Kraków won a PLN 6m contract from PKE to build employee facilities for the staff working on a 460MW supercritical unit at the Łagisza Power Plant. This is a small assignment accounting for 3% of Instal Kraków’s consolidated FY2006 revenues. Instal Kraków: A PLN 65m deal Instal Kraków gave a PLN 65m order to Przedsiębiorstwo Budownictwa Ogólnego Skobud sp. z o.o. to build four multi-family multi-storey residential buildings and adjoining facilities, service lines, parking spaces, service roads, lighting, etc., in Krakow. A few weeks ago, the company reported that it was preparing a real-estate development project in Krakow. The project’s deadline is February 2009. It covers ca. 15,000 sqm of usable living space. We estimate that it will generate ca. PLN 30m net. Mostostal Export: PLN 42.1m deal Mostostal-Export revealed that the contract it had signed a year ago for a residential complex in Novosibirsk is worth EUR 10.7m (PLN 42.1m). Mostostal Export: Ownership reshuffling? CEP and shareholder Michał Skipietrow announced his imminent resignation in an interview of Puls Biznesu. He is going to present a growth plan for the company by 20th September, either as in independent entity, or by seeking an industry-based or financial investor. After selling some assets, Mostostal Export has PLN 30m in cash at its disposal, a few contracts in the pipeline (mainly from Poland’s eastern neighbors), and a small-real estate project in Warsaw underway (PLN 17-18m). A new management and a new investor would significantly boost Mostostal Export’s value. Mostostal Płock: PLN 5.1m contract In the last three months, Mostostal Płock signed contracts with PKN Orlen with a combined value of PLN 5.1m. The biggest deal was for PLN 1.9m-worth of renovation works in a hydrocracking plant. The contracts account for over 5% of Mostostal’s FY2006 revenues.

BRE Bank Securities

1 August 2007 50


Mostostal Warszawa: PLN 13.5m contract Wrobis, Mostostal Warszawa’s 98.05% subsidiary, signed a contract with Aalberts Idustries Polska for design and construction of manufacturing facilities as general contractor. The gross value of the contract is PLN 13.5m. The deadline is January 2008. This is a relatively small deal that accounts for less than 2% of FY2006 revenues. Mostostal Zabrze: PLN 5.4m Norwegian deal Mostostal Zabrze’s subsidiary “Mostostal Zabrze Zakład Montażowo-Produkcyjny "Kędzierzyn"” signed a EUR 1.4m contract with Aker Kvaerner (Norway) for steel components for a drilling rig scheduled for completion in July 2008. This is a relatively small contract that nevertheless paves the way for Mostostal Zabrze to the Norwegian market. Naftobudowa: Funds increase shareholdings PZU Asset Management increased its equity interest in Naftobudowa from 12.04% to 12.43% by purchasing close to 23,000 shares. Naftobudowa: PLN 18.7m contract from Mazeikiu Nafta Naftobudowa received an order from Mazeikiu Nafta for renovation work for EUR 5m (PLN 18.7m). The Mazeikiai refinery has been a source of a considerable amount of business for Naftobudowa over the past few months. This particular contract accounts for 14% of the company’s consolidated FY2006 revenues. PBG: PLN 55m deal A consortium of Hydrobudowa Włocławek, PBG, Zakład Usługowy Wiertmar, and Teco, signed a PLN 55m contract for a sewage network in Strachocin–Wojnów, with a deadline in March 2009. This is a new environmental engineering contract for PBG which accounts for just under 5% of the company's FY2007 revenue target. Pol-Aqua: Offering price set at PLN 77 The offering price of Pol-Aqua’s shares was set at PLN 77 a share, the high end of the proposed price range. The company expects to gross PLN 230 million on the offering, to be allocated to working capital, capital injections in subsidiaries, PP&E purchases, and acquisitions.

BRE Bank Securities

1 August 2007 51


Analyst: Krzysztof RadojewskiLast Recommendation: 2007-05-29



Budimex (Hold)Current price: PLN 107 Target price: PLN 121.7

25

45

65

85

105

125

145

165

185

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Budimex WIG

Budimex landed PLN 340m-worth of deals in July, accounting for close to 9% of our FY2007 revenue estimate. These are most private orders (mainly from real-estate developers), which shows that the eagerly awaited road-building boom has not arrived yet. A number of public contract tenders have been canceled recently due to overpriced bids. This has to change if Poland wants to get the full benefit of the 2007-2013 EU allocations. Meanwhile, we expect weak second-quarter results from Budimex, and investors will not be surprised to see a bottom line close to zero. We are reiterating a hold rating on Budimex. PLN 38.2m contract Budimex’s wholly-owned subsidiary Budimex Dromex signed a PLN 38.1m contract with MDI Sp. z o.o. for a housing estate in Świdnik. The deadline is set at the end of 2008. This is a small contract that will contribute an estimated 1% to our FY2007 consolidated revenue estimate for Budimex. Subsidiaries sign PLN 92.4m contract Budimex Dromex and Budimex Nieruchomości Inwestycje (the former a wholly owned subsidiary, and the latter a 50% subsidiary of Budimex) signed a PLN 92.4m contract to build a housing estate in Warsaw, with a deadline on June 30th, 2009. This intra-group contract accounts for ca. 2.5% of our FY2007 revenues estimate for Budimex. PLN 151.9m contract Budimex Dromex signed a PLN 151.9m contract with Bouygues Immobilier Polska for a housing estate in Warsaw. The deadline is April 2009. The job accounts for just under 4% of our FY2007 consolidated revenue estimate for Budimex. PLN 57.1m contract Budimex Dromex signed a contract to expand a municipal waste management plant in Toruń for a consideration of EUR 15.2m (PLN 57.1m). The deadline is June 2009. The contract accounts for 1.5% of our FY2007 consolidated revenue estimate for Budimex.

BRE Bank Securities

1 August 2007 52





Elektrobudowa (Hold)Current price: PLN 248 Target price: PLN 221.5

20

60

100

140

180

220

260

300

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Elektrobudowa WIG

Elektrobudowa revised its earnings guidance to PLN 300m in July, and landed a PLN 14.3m contract. We expect a strong FQ2 showing, but not strong enough to prompt an upward revision in our earnings projections and valuation. We are reiterating a hold rat-ing on Elektrobudowa. Insider sells 25,000 shares An entity related to Elektrobudowa’s supervisory board sold 25,000 shares for PLN 242 apiece. PLN 14.3m contract Elektrobudowa won a PLN 14.3m contract from PKN Orlen for electrical works with a deadline in November 2007. The core-business contract accounts for 2.6% of our FY2007 consolidated revenue estimate for Elektrobudowa.

BRE Bank Securities

1 August 2007 53



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 394.7 690.0 74.8% 787.7 14.2% 874.1 11.0% Number of shares (m) 12.6EBITDA 28.2 36.4 28.8% 42.7 17.5% 48.9 14.4% MC (current price) 1 149.6EBITDA margin 7.2% 5.3% 5.4% 5.6% EV (current price) 983.7EBIT 27.2 35.2 29.3% 41.5 17.9% 47.5 14.5% Free f loat 27.0%Net profit 21.3 28.0 31.4% 33.3 19.0% 38.6 15.8%

P/E 43.2 41.0 34.5 29.8 Price change: 1 monthP/CE 41.3 39.4 33.3 28.8 Price change: 6 monthP/BV 23.1 6.0 5.1 4.3 Price change: 12 monthEV/EBITDA 31.6 27.0 22.3 18.8 Max (52 w eek) 94.6Dyield (%) 0.1 0.0 0.0 0.0 Min (52 w eek) 82.5

Erbud (Accumulate)Current price: PLN 91.5 Target price: PLN 100

Erbud landed a material PLN 45m contract in July. As far as acquisitions are concerned, the company has not managed to complete any yet, which was probably the reason for the recent depreciation in its stock price. We maintain that Erbud will use the capital raised through the IPO to finance takeovers, and its value will go up. That is why we are reiterating it as an accumulate. PLN 1.3 m annex Erbud signed an annex to its contract for an office/commercial building in Poznań increasing its consideration from PLN 16.1m to PLN 17.4m. This increase will offset any hike in the contract’s costs. PLN 45m contract Erbud signed an annex to a contract with Galeria Park to include multi-family residential buildings. The contract price is PLN 45m, and the deadline is November 2008. The assignment accounts for 6.5% of our FY2007 consolidated revenue estimate for Erbud. PLN 4.4m contract Erbud won a contract to redevelop a spa and wellness center in Szczecin for PLN 4.4m. The contract is another in a series of assignments received as part of one project, which is estimated at PLN 14.8m.

BRE Bank Securities

1 August 2007 54


20

65

110

155

200

245

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Hydrobudowa Śląsk WIG


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 129.4 205.0 58.4% 330.0 61.0% 462.0 40.0% Number of shares (m) 3.4EBITDA 10.6 13.3 25.0% 32.0 141.3% 49.6 55.1% MC (current price) 679.5EBITDA margin 8.2% 6.5% 9.7% 10.7% EV (current price) 697.6EBIT 8.4 11.5 36.4% 30.1 161.3% 47.4 57.8% Free float 37.0%Net profit 7.2 19.3 169.3% 17.1 -11.4% 32.7 91.5%

P/E 95.0 35.3 39.8 20.8 Price change: 1 month 3.8%P/CE 72.9 32.3 35.8 19.5 Price change: 6 month 38.4%P/BV 44.0 20.9 13.9 Price change: 12 month 115.8%EV/EBITDA 65.8 57.1 23.7 15.3 Max (52 w eek) 237.0Dyield (%) 0.0 0.0 0.0 2.4 Min (52 w eek) 77.2

Hydrobudowa Śląsk (Hold)Current price: PLN 201.9 Target price: PLN 209

According to the merger schedule, Hydrobudowa Śląsk’s shares will see their last trading day on August 2nd, and the merged company, called "Hydrobudowa Polska," will make its market debut on August 21st. As the delisting day approaches, we do not expect the stock to experience any major movements. As per the exchange ratio, Hydrobudowa Śląsk will account for 48% of Hydrobudowa Polska, which, at our target of PLN 209/share, implies that the merged company could be worth some PLN 1.5 billion. We are reiterating a hold rating on Hydrobudowa Śląsk. PLN 24.2m contract with PBG Hydrobudowa Śląsk signed a contract with its parent PBG for four 10 000m3 fuel tanks to be set up at Fuel Base 10 in Katowice for PLN 24.2m. The contract accounts for 11.8% of our FY2007 revenue estimate for Hydrobudowa Śląsk.

BRE Bank Securities

1 August 2007 55





Polimex Mostostal (Accumulate)Current price: PLN 220 Target price: PLN 297.7

Polimex acquired a small building firm in July, with a view to increasing its sales from PLN 30m to PLN 70-90m in two years’ time. In other news, the company landed a PLN 100m deal from the Połaniec Power Plant. As for the second-quarter results, we expect a strong showing. We are reiterating an accumulate rating on Polimex. Small acquisition Polimex-Mostostal purchased 100% of the shares of “Zakład Budowlano-Instalacyjny Turbud” (Płock) for a total PLN 2.1m. As additional consideration, if Turbud reaches sales revenues of PLN 30m in 2008 (net profit margin at 2.4%), PLN 70m (net profit margin at 2.7%) in 2009, and PLN 90m (net profit margin 3%) in 2010, Polimex will pay the shareholders PLN 300,000 for the first two years and PLN 400,000 in 2010. Turbud’s core business is general-purpose construction, housing, industrial plants, infrastructure, and manufacture of building materials. The objective of this acquisition was probably to increase capacity. Bond offering cap raised to PLN 350m Polimex-Mostostal signed annexes to its agreements with BRE Bank concerning a five-year bond offering program, raising the program’s value cap from PLN 250m to PLN 350m. The higher cap serves to increase financing capacity. At the end of FQ1, Polimex reported PLN 144.5m in long-term bonds, PLN 34m in short-term bonds, and PLN 17m in other net debt in its balance sheet. PLN 102.8m deal Polimex-Mostostal signed a contract to work as general contractor in connecting eight power generating units to existing FGD facilities and build a new chimney at the Połaniec Power Plant for PLN 102.8m.

40

80

120

160

200

240

280

320

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Polimex-Mostostal WIG

BRE Bank Securities

1 August 2007 56



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 777.2 1 254.5 61.4% 1 127.3 -10.1% 1 078.0 -4.4% Number of shares (m) 17.4EBITDA 32.0 43.4 35.6% 64.6 48.8% 74.2 14.7% MC (current price) 267.1EBITDA margin 4.1% 3.5% 5.7% 6.9% EV (current price) 198.6EBIT 20.9 29.5 40.7% 52.4 77.8% 57.5 9.7% Free f loat 45.0%Net profit 12.8 19.9 55.8% 37.0 86.0% 41.8 12.9%


Rafako (Reduce)Current price: PLN 15.4 Target price: PLN 11.4

5

7

9

11

13

15

17

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Rafako WIG

We expect Rafako to show a notable y/y increase in sales spurred by buoyant FGD orders, but without a major impact on profits. With a less-than-stellar FQ2 performance, our call on Rafako stays reduce.

BRE Bank Securities

1 August 2007 57



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 154.3 224.6 45.6% 263.6 17.4% 292.1 10.8% Number of shares (m) 5.3EBITDA 74.7 112.8 51.0% 140.7 24.7% 167.3 19.0% MC (current price) 1 786.9EBITDA margin 48.4% 50.2% 53.4% 57.3% EV (current price) 1 888.3EBIT 45.6 69.4 52.1% 84.1 21.2% 99.1 17.8% Free f loat 25.0%Net profit 32.9 51.9 57.6% 61.3 18.1% 75.3 22.9%


Ulma Construccion Polska (Hold)Current price: PLN 340 Target price: PLN 320.8

Ulma’s strong second-quarter showing testifies to its ability to leverage industry momentum. Higher-than-expected profit prompted an upward revision to our FY2007 estimate from PLN 46.8m to PLN 51.9m. Based on our updated DCF valuation model, we set the new nine-month per-share price target at PLN 320.8, with a reiterated hold rating. Good quarterly results Ulma’s FQ2 consolidated revenues came in at PLN 55.3m (up 50.6% y/y, our estimate was PLN 48.9m), EBITDA was reported at PLN 26.5m (+59% y/y, in line), and the bottom line showed a profit of PLN 12.8m (up 87.7% y/y, we estimated PLN 11.5m). EUR 5.7m deal Ulma Construccion Polska signed a contract with Transmechanizacja Sp. z o.o. (Kazakhstan) for sales of formworks, machines and equipment, know-how, licenses, and formwork rental training services. The contract value is EUR 5.7m (PLN 22m). Ulma will recognize revenues from the contract for 10-11 months starting in July 2007. Kazakhstan is Ulma Construccion Polska’s biggest export market. The latest contract fits within our PLN 40m sales forecast for this market.

-80

20

120

220

320

420

520

620

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Ulma WIG

BRE Bank Securities

1 August 2007 58





Farmacol (Accumulate)Current price: PLN 52.2 Target price: PLN 62.9

30

35

40

45

50

55

60

65

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Farmacol WIG

Farmacol is poised to benefit from its land interests and generate additional profit margins on future housing projects located in Warsaw and other cities in Poland. But the real-estate development business will not start to show in its earnings results until FY2008. As for the second-quarter earnings outlook, we expect Farmacol’s revenues to rise above the market average and come in at PLN 882.4m (+8% y/y), with net profit at PLN 13.5m (+7.5% y/y). Our full-year bottom line estimate is PLN 70.7m, implying a P/E of 17. Watching PGF’s latest M&A activity in Lithuania, Farmacol is also making plans to look for acquisition targets abroad. Because, in our view, Farmacol’s real-estate business is not yet priced in its stock, we are reiterating it as an accumulate.

Pharmaceutical Manufacturers and Distributors

BRE Bank Securities

1 August 2007 59



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 4 006.0 4 204.7 5.0% 4 412.2 4.9% 4 631.9 5.0% Number of shares (m) 12.2EBITDA 108.1 104.4 -3.4% 114.4 9.5% 123.4 7.9% MC (current price) 1 382.6EBITDA margin 2.7% 2.5% 2.6% 2.7% EV (current price) 1 652.2EBIT 87.0 84.3 -3.1% 95.4 13.1% 105.3 10.4% Free float 47.9%Net profit 62.5 70.3 12.5% 80.0 13.8% 88.8 11.0%


PGF (Under Review)Current price: PLN 113 Target price: -

50

70

90

110

130

2006-07-25 2006-11-14 2007-03-07 2007-07-02

PGF WIG

PGF made a smart move in taking over several Lithuanian firms. The historical earnings figures of these acquisitions show that the company can earn profit margins in Lithuania twice as high as at home. In the best-case scenario, the new acquisitions can add as much as EUR 4-5 million to net profit (equivalent to PLN 15-19m before financing costs; our FY2008 net profit estimate is PLN 80m), prompting us to revise up our earnings projections and valuation for that year and subsequent. We are putting our investment rating on PGF on hold until it completes these significant takeovers. PLN 30m pharmacy purchase PGF signed two conditional agreements: one to acquire a 82.23% stake in “Apexim” for PLN 27.4m, and one to acquire a 100% stake in “Apteka Rodzinna” for PLN 3.1m. Apexim runs some 30 pharmacies an an online pharmacy. The acquisitions prove that PGF is building a stronger presence for itself in Retail. Assuming that an average pharmacy generates monthly sales of PLN 130,000 (source: PharmaExpert), the two acqiurees will boost PGF’s sales by at least PLN 50m (over 1% of the current revenues). The impact on this year’s earnings will be negligible. Next year, however, profit might be PLN 1m higher. PGF sets up London operations PGF set up a subsidiary called "DOZ UK LIMITED" in London, with an initial capital of GBP 10,000, taken up in whole by PGF’s subsidiary DOZ S.A. as a long-term investment and a way to finance equity. Investments in Lithuania PGF signed a framework agreement for capital investments in Lithuania. The company will set up an SPV in Lithuania which will take over several pharmaceutical wholesalers and retailers, most notably Limedica (the third largest wholesaler with EUR 74m sales and EUR 3.4m net profit for FY2006, and a market share of 18%), and Gintarine Vastine (pharmacy chain owner with FY2006 sales at PLN 25m, and a bottom line loss of EUR 1m). Expansion in Lithuania is a smart move on PGF’s part. Limedica’s historical earnings figures show that it generates profit margins up to twice as high as PGF. Furthermore, IMS Health forecasts that, between 2007 and 2011, the Lithuanian market will grow at double-digit rates on increasing income of the population and higher drug refunds. All this proves that he acquisitions were a smart call on PGF’s part, as a springboard for future international expansion. The earnings impact of these acquisitions is expected to be neutral in FY2007 and positive in FY2008. Gintarine Vastine is also expected to generate a profit this year. We did not take such acquisitions into account when determining PGF’s value, but we see potential to raise our forecasts from FY2008 onward. In the best-case scenario, the new acquisitions can add as much as EUR 4-5 million to net profit (equivalent to PLN 15-19m before financing costs; our FY2008 net profit estimate is PLN 80m). Fitch places PGF on credit watch The new rating is a result of PGF’s plans to acquire Lithuanian pharmaceutical wholesalers and retailers for a total PLN 22.5m, which will deepen its debt. This is a standard procedure which will not in any way affect PGF.

BRE Bank Securities

1 August 2007 60



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 817.2 1 944.4 7.0% 2 041.6 5.0% 2 143.7 5.0% Number of shares (m) 6.9EBITDA 23.2 26.2 12.9% 27.1 3.5% 28.0 3.5% MC (current price) 181.7EBITDA margin 1.3% 1.3% 1.3% 1.3% EV (current price) 237.9EBIT 17.7 20.4 15.1% 21.4 5.0% 22.5 5.0% Free f loat 58.1%Net profit 11.9 13.8 15.8% 14.8 7.0% 15.9 7.5%


Prosper (Hold)Current price: PLN 26.3 Target price: PLN 27

Now that Torfarm took over Optima Radix, Prosper remains the smallest of the pharmaceutical wholesalers listed on the Warsaw Stock Exchange. We expect that the company will focus on streamlining its operations in the quarters ahead, possibly leading to a slight increase in margins. As for the second-quarter earnings outlook, we expect Prosper's revenues to rise in line with the market average (+5% y/y), and net profit to come in at PLN 2.2m (+15.4% y/y). We are reiterating a hold rating on Prosper.

13

15

17

19

21

23

25

27

29

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Prosper WIG

BRE Bank Securities

1 August 2007 61



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 700.9 2 720.9 60.0% 2 993.0 10.0% 3 172.6 6.0% Number of shares (m) 2.7EBITDA 18.4 33.8 83.5% 45.3 34.0% 51.5 13.5% MC (current price) 251.3EBITDA margin 1.1% 1.2% 1.5% 1.6% EV (current price) 319.7EBIT 13.7 25.1 83.1% 36.5 45.3% 42.4 16.4% Free float 49.0%Net profit 11.3 15.8 40.3% 26.1 64.7% 32.4 24.2%


Torfarm (Hold)Current price: PLN 93 Target price: PLN 95.3

50

60

70

80

90

100

110

120

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Torfarm WIG

In July, Torfarm acquired a further block of shares in Optima Radix and received permis-sion to finalize the acquisition, which gave it a stronger positioning in the pharmaceutical wholesale industry. We expect to see cost synergies (storage space) and economies of scale (higher discounts from manufacturers) in Torfarm’s earnings in a few quarters. As soon as the third quarter, we anticipate that revenues will increase substantially to PLN 612.4m (+60.1% y/y), driving profit to PLN 2.1m (+75.4% y/y). We estimated Torfarm’s ‘07 P/E at 22.4, and predict that it will fall to a much more attractive, although more risky level of 13.6 next year. Since we do not see any reasons to revise our projections and rating for Torfarm, We are reiterating it as a hold. Fund exceeds 5% shareholding threshold PZU Asset Management increased its equity interest in Torfarm from 4.73% to 5.04%. UOKiK OKs acquisition of 27.6% stake in Optima Radix Torfarm acquired a further 243,900 registered shares of Optima Radix, increasing its interests in the company to 95.7%. The price of a 100% stake in Optima Radix will total PLN 15.9m-PLN 28.3m. By acquiring Optima Radix, Torfarm increased its market share above 18%. The compe-tition watchdog has given a green light for the takeover, which gave it a stronger positioning in the pharmaceutical wholesale industry. We expect to see cost synergies (storage space) and economies of scale (higher discounts from manufacturers) in Torfarm’s earnings in a few quar-ters.

BRE Bank Securities

1 August 2007 62



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 4 064.2 4 590.2 12.9% 5 153.3 12.3% 5 732.1 11.2% Number of shares (m) * 13.3EBITDA 110.5 145.5 31.6% 182.1 25.2% 203.5 11.8% MC (current price) * 1 851.2EBITDA margin 2.7% 3.2% 3.5% 3.6% EV (current price) * 2 078.7EBIT 79.0 107.2 35.6% 135.3 26.3% 147.3 8.9% Free f loat 33.1%Net profit 57.1 78.4 37.3% 102.2 30.3% 113.2 10.8%


Emperia Holding (Hold)Current price: PLN 139.5 Target price: PLN 134.17

30

55

80

105

130

155

180

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Emperia Holding WIG

After a recent pullback, the price of Emperia’s stock came close to our target, prompting us to upgrade to HOLD. The company is scheduled to release its FQ2 earnings report on August 14th, and we expect a strong showing (with net profit as high as PLN 33m), which is bound to get investors excited even if the buoyant results are mostly owed to a one-time real-estate sale. We hope that, on the occasion of the earnings conference, Emperia’s management will shed more light on the recent acquisitions. Real estate sale Emperia’s subsidiary Stokrotka sold a property in Mława for PLN 22.9m. The property’s book value was PLN 9.9m, meaning that we can expect the company to post a PLN 13m pre-tax profit on the sale (probably in Q2). Stokrotka leased back the space it has occupied in the building. The sale should be considered a one-off with negligible impact on valuation. Granted, the gains will reduce the company’s net debt and can be reinvested to advance operations, but keep in mind that now that the property has been sold, in the coming months, Stokrotka will record higher cash expenses (rent), and lower non-cash charges (amortization and depreciation), which should theoretically offset the selling price in the long term (today’s cash inflows will be offset tomorrow by regular outflows in rent charges). Therefore, the only additional value for Stokrotka comes from the part of the property that was not leased back. A rival in industry integration A company called Rabat Pomorze, whose shareholders had decided against being incorporated by Emperia Holding, has plans to actively engage in the consolidation of the retail industry. Rabat Pomorze, operator of over1200 franchise stores, merged with LD Holding (250 “Ele” stores, FY2006 revenues at PLN 936m) and the wholesaler Curyło-Asterix (its markets are the dolnośląskie, małopolskie, and śląskie voivodships), and plans to make a market debut next year. In May, it sold 25% of its shares to IDM SA (a shareholder of the “Bomi” chain), probably as part of its strategy to build a successful FMCG business with a significant market presence. What this means for Emperia is a fierce rival in the race to find good and cheap acquisition targets, which has a similar expansion strategy (stock-for-stock takeovers). Społem Tychy acquisition official Emperia took over a 48.6% stake in Społem Tychy for PLN 6.9m, upping its shareholding interest to 62.9%. Having no access to Społem Tychy’s income statement, we have no way of telling whether the company has been an Emperia customer (which would mean eliminations), or what impact the acquisition will have on Emperia’s valuation. Ex-rights stock offering Emperia’s shareholders decided that the 1.5 million share offering scheduled for the fall will be issued without preemptive rights. The shareholders furthermore approved payment of dividends of PLN 1.74 per share, with the date of record set at September 14th.

*adjusted for the shares placed to BOS shareholders

Retail

BRE Bank Securities

1 August 2007 63





Eurocash (Sell)Current price: PLN 11 Target price: PLN 7.38

4

6

8

10

12

14

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Eurocash WIG

Investors are not going to be happy about Eurocash’s second-quarter results, and we do not expect to be urged to make upward revisions to our full-year earnings projections for the company. Looking at the stock price, we think that the promised future acquisitions (when and what companies will be taken over remains a mystery) are already priced in. We do not see Eurocash making an acquisition that would justify paying PLN 10 for one share of its stock any time soon. That is why we are reiterating our price target and sell rating.

BRE Bank Securities

1 August 2007 64



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 851.2 812.5 -4.5% 829.0 2.0% 845.8 2.0% Number of shares (m) 14.9EBITDA 180.4 178.8 -0.9% 184.5 3.2% 183.3 -0.6% MC (current price) 847.8EBITDA margin 21.2% 22.0% 22.3% 21.7% EV (current price) 1 200.1EBIT 86.2 88.0 2.0% 96.9 10.1% 98.8 2.0% Free floatNet profit 50.8 53.7 5.7% 62.1 15.7% 65.7 5.8%


Kogeneracja (Under Review)Current price: PLN 56.9 Target price: -

35

45

55

65

75

85

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Kogeneracja WIG

Our expectations for Kogeneracja’s second-quarter earnings season include a moderate improvement in operating effectiveness, and lower finance costs generated by the Zielona Góra CHP. We predict that the consolidated bottom line will show a PLN 6.3m loss (vs. a PLN 9.9m net loss in FQ2’06). On the upside, we anticipate a positive surprise from PPO Siechnice. Last year, this subsidiary generated a PLN 6.8m net profit in the second quarter (the share attributable to Kogeneracja is 51%). This year, the bottom line might be even better thanks to an enlargement of its cropland area (by an estimated 30%), and could reach a net profit similar to last year’s. If the consolidated second-quarter it ends around zero, Kogeneracja could show a net profit of over PLN 60m, which would imply a ’07 P/E of 14. In addition, electricity prices will inevitably go up in the next few years as the Polish industry gets around to modernizing capacity and as long-term contracts are being terminated. PLN 1.85 dividend Kogeneracja will pay PLN 27.6m (PLN 1.85/share) as dividends to shareholders. Negotiations with workers Kogeneracja’s management are negotiating salary terms with trade unions. They expect a single-digit increase in salaries this year. Kogeneracja’s salary costs in FY2006 amounted to PLN 64m. These costs are taken into account in the price-setting process, hence a single-digit increase will not affect earnings.

Others

BRE Bank Securities

1 August 2007 65



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 443.9 1 603.4 11.0% 1 673.1 4.3% 1 695.4 1.3% Number of shares (m) 50.0EBITDA 434.9 466.5 7.3% 480.9 3.1% 476.7 -0.9% MC (current price) 4 900.0EBITDA margin 30.1% 29.1% 28.7% 28.1% EV (current price) 4 899.7EBIT 326.4 368.9 13.0% 380.9 3.2% 366.6 -3.7% Free f loat 19.0%Net profit 270.0 303.3 12.3% 313.2 3.3% 301.4 -3.8%


Mondi (Reduce)Current price: PLN 98 Target price: PLN 80

60

70

80

90

100

110

120

2006-07-25 2006-11-14 2007-03-07 2007-07-02

Mondi WIG

We maintain that the price of MPP’s stock already factors in the paper market’s current cycle. A strong euro and the slowdown in US and EU economies is likely to cause an oversupply of paper in Europe that will bring prices down. On the cost front, the company will start to feel the impact of growing wood prices and salaries. We rate MPP as a reduce. Wood prices to go up again The national forest administration (Lasy Państwowe – “LP”) is readying a price hike to satisfy the salary demands of its workers. This is a big surprise for buyers given the rule set by the LP itself that prices are to be set in advance for the whole year. A meeting is set for Thursday between the heads of regional LP directorates to negotiate this year’s prices. The hike caught the entire industry by surprise. The average price of sawmill wood increased 7% this year, which is very bad news for MPP where wood accounts for 27% of total costs. But the prices of the end-products are not dependent on wood, but on the prices of paper prevailing in Europe. Paper prices Kraftliner prices stayed virtually flat throughout last month, both in euro terms (+0.16%), and in PLN terms (-0.23%). Testliner rose 0.57% from June (0.17% in PLN), and fluting increased 1.13% (0.73% in PLN). In the USA, orders for corrugated cardboard paper declined for a third month in a row in June (-3.7%). Supply and demand remain balanced thanks to growing exports from the US to the booming European market, as a response to the depreciating dollar. Paper prices in Europe stay in check for now, but if the euro stays strong and the economy cools, we will most likely see an oversupply of cardboard.

BRE Bank Securities

1 August 2007 66


Research Department: Michał Marczak tel. (+48 22) 697 47 38 Director [email protected] Strategy, telco, mining, metals, media Marta Jeżewska tel. (+48 22) 697 47 37 Deputy Director [email protected] Banks

Analysts: Krzysztof Radojewski tel. (+48 22) 697 47 01 [email protected] Pharmaceuticals, construction, utilities Kamil Kliszcz tel. (+48 22) 697 47 06 [email protected] Retail, materials, other Piotr Janik tel. (+48 22) 697 47 40, [email protected] IT, other

Kacper Żak tel. (+48 22) 697 47 41 [email protected] Developer, other Jacek Borawski tel. (+48 22) 697 48 88 [email protected] Technical analysis

Sales and Trading:

Piotr Dudziński tel. (+48 22) 697 48 22 Director [email protected] Grzegorz Domagała tel. (+48 22) 697 48 03 Deputy Director [email protected] Marzena Łempicka-Wilim tel. (+48 22) 697 48 95 Deputy Director [email protected] Traders: Emil Onyszczuk tel. (+48 22) 697 49 63 [email protected] Grzegorz Stępien tel. (+48 22) 697 48 62 [email protected] Tomasz Dudź tel. (+48 22) 697 49 68 [email protected] Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/49 00-950 Warszawa www.dibre.com.pl

BRE Bank Securities

1 August 2007 67


List of abbreviations and ratios contained in the report. EV – net debt + market value (EV – economic value) EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation PBA – Profit on Banking Activity P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales Recommendations of BRE Bank Securities S.A. A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The present report was prepared with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. This document does not constitute an offer or invitation to subscribe for or purchase any financial instruments and neither this docu-ment nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. This document nor any copy hereof is not to be distributed directly or indirectly in the United States, Australia, Canada or Japan. Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation. Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible. BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any dam-ages incurred as a result of investment decisions taken on the basis of the present report. It is possible that BRE Bank Securities S.A. renders, will render or in the past has rendered services for companies and other enti-ties mentioned in the present report. BRE Bank Securities S.A., its shareholders and employees may hold long or short positions in the issuers’ shares or other financial instruments related to the issuers’ shares. BRE Bank Securities S.A., its affiliates and/or clients may conduct or may have con-ducted transactions for their own account or for account of another with respect to the financial instruments mentioned in this report or related investments before the recipient has received this report. Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of BRE Bank Securities S.A. Recommendations are addressed to all Clients of BRE Bank Securities S.A. The activity of BRE Bank Securities S.A. is subject to the supervision of the Polish Financial Supervision Commission. BRE Bank Securities S.A. serves as animator in relation to the shares of the following companies: Erbud, Es-System, Komputronik, Mieszko, Mondi, Opera za 3 Grosze FIZ, Pemug, Polimex - Mostostal Siedlce, Torfarm, Ulma Construccion Polska, Skarbiec Nieruchomości certificates. BRE Bank Securities S.A. receives remuneration from issuers for services rendered to the following companies: ABG Ster-Projekt, Ambra, Amerbank, Agora, Bakalland, BRE Bank, CSS Suport, Elektrobudowa, Enap, Erbud, Elzab, ES –System, Huta Ferrum, Inter Groclin, Kęty, Koelner, Mennica Polska, Mieszko, Mondi, Neonet, Odratrans, Paged, Pemug, Polnord, PGNiG, Polimex - Mostostal Siedlce, Polmos Lublin, Prochem, Prokom Software, Provimi - Rolimpex, Sanwil, Skarbiec Lokacyjny, Skarbiec Nieruchomości, Sokołów, Sygnity, Techmex, Torfarm, Zelmer. In the last 12 months BRE Bank Securities S.A. has been an offering agent of the issuer’s shares in a public offering for the follow-ing companies: ATM, Energomontaż Północ, Erbud, Es-System, Fortis Bank Polska, Komputronik, Polimex-Mostostal, MNI, Tor-farm, Ulma Construccion Polska. Asseco Poland provides information technology services to BRE Bank Securities. The information, including recommendations, contained in the Monthly Report has been published in separate reports, the publica-tion dates of which are located on page 5 of the full version of the Monthly Report. The list of recommendations that have been changed in the Monthly Report is located on page 6 of the present publication. The present report was not transferred to the issuer prior to its publication. Individuals who did not participate in the preparation of recommendations, but had or could have had access to recommendations prior to their publication, are employees of BRE Bank Securities S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendations.

BRE Bank Securities

1 August 2007 68


Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.

Ratings changes as of the date of this Monthly Report:

rating Reduce

date issued 2006-11-07

price at rating date 78.00 WIG at rating date 48767.01

Accumulate

2006-11-24

78.00 49701.36

Hold

2006-12-05

92.90 51680.97

Reduce

2007-02-05

96.00 55314.03

Sell

2007-04-05

115.00 57981.75

Reduce

2007-05-21

149.50 59667.38

Emperia Holding

rating Accumulate



Buy

2007-04-04

95.35 56288.81

Hold

2007-06-06

117.80 64622.68

Accumulate

2007-07-03

109.00 65637.39

KGHM

rating Hold Buy Accumulate Accumulate

date issued 2006-11-07 2006-11-29 2006-12-05 2007-01-09

price at rating date 755.00 724.00 760.00 760.00 WIG at rating date 48767.01 49344.90 51680.97 50477.49

Hold

2007-02-05

822.00 55314.03

Accumulate

2007-02-20

796.00 54712.06

ING BSK

rating Reduce



Handlowy cont.

rating Hold Hold Hold

date issued 2006-11-07 2006-11-29 2007-01-09

price at rating date 76.80 79.00 83.60 WIG at rating date 48767.01 49344.90 50477.49

Hold

2007-02-20

98.00 54712.06

Accumulate

2007-05-11

98.50 59328.29

Sell

2007-06-06

130.00 64499.16

Handlowy

ING BSK cont. rating Hold Hold Reduce

date issued 2007-05-09 2007-05-31 2007-06-06

price at rating date 816.50 991.00 1025.00 WIG at rating date 60116.28 62779.18 64499.16

BRE Bank Securities

1 August 2007 69


rating Accumulate Hold

date issued 2007-03-05 2007-05-09

price at rating date 40.13 46.45 WIG at rating date 51917.31 60116.28

Lotos

rating Reduce



PGF

rating Hold



Hold

2007-01-29

54.00 53487.96

Reduce

2007-04-05

62.45 57981.75

Sell

2007-05-09

72.50 60116.28

Koelner

rating Reduce

date issued 2006-11-13 price at rating date 41.20 WIG at rating date 49032.64

Sell

2006-12-05 45.70

51680.97

Reduce

2006-12-11 48.50

52166.51

Reduce

2007-01-09 48.00

50477.49

Hold

2007-03-05 45.10

51917.31

Reduce

2007-04-05 47.79

57981.75

PKO BP

rating Hold Hold

date issued 2007-04-27 2007-05-31 price at rating date 50.70 53.50 WIG at rating date 59477.13 62779.18

PKO BP cont.

Macroeconomics Monthly Reporti.wp.pl/a/dibre/rmiesieczne/august2007.pdfStrong commodity prices and a...

Documents

Transcript of Macroeconomics Monthly Reporti.wp.pl/a/dibre/rmiesieczne/august2007.pdfStrong commodity prices and a...