August, 2012
BULGARIA
Investment Opportunities
August, 2012
Economic development
• The economy is recov-
ering slowly • The main source of
growth is export • Domestic consumption
is lagging behind due to the shrinking bank loans
• Industrial production
is expanding again, sup-ported by export
• All industries recov-
ered during the second quarter
• Contraction in textile,
paper and chemical sectors was worst in late 2011 but they also grew this year
-6%
-4%
-2%
0%
2%
4%
6%
8% GDP
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8% Consumption
80
90
100
110
120
130
140
2006 2007 2008 2009 2010 2011 2012
Industrial Production SA
0
50
100
150
200
250
2009 2010 2011 2012
Industrial Production
Domestic
Export
August, 2012
Inflation and income
• The crisis in domestic
demand resulted to sub-dued consumer prices
• Home prices declined,
although they remain ele-vated to average monthly wages
• Bulgaria has an ad-
vantage in terms of wages and the energy price when comparing to Eastern Eu-rope
• The increase of wages
will continue and will pro-vide better foundations for economic growth, financial stability and improvement of government budget in long term
0.00 0.05 0.10 0.15
Bulgaria
Czech Republic
Greece
Hungary
Poland
Romania
Slovakia
Slovenia
EU AverageElectricity Price 2011
Amount is in euro (€) per kiloWatthour (kWh)
-202468
1012141618
2006 2007 2008 2009 2010 2011 2012
CPI
0
200
400
600
800
1 000
1 200
1 400 Home Prices in EUR
Bulgaria
Sofia
050
100150200250300350400450500
2006 2007 2008 2009 2010 2011 2012
Average Wages In EUR
Public Sector
Private Sector
August, 2012
Financial Stability – Balance of Payment
• After running huge
current account deficits for years, Bulgarian economy managed to improve the ra-tio due to decrease in con-sumption and investments
• Foreign direct invest-
ments are rising but main-tain high volatility and are still near the bottom
• The current account
deficit is rising since the beginning of 2012. It is not a risk factor for the finan-cial stability as it is deter-mined by seasonality in oil imports and revenues from tourism
-30
-25
-20
-15
-10
-5
0
5
2007 2008 2009 2010 2011
Current Account
% of GDP
-1400-1200-1000
-800-600-400-200
0200400600800
2006 2007 2008 2009 2010 2011 2012
Current Account
EUR mln.
0
5 000
10 000
15 000
20 000
25 000
02 03 04 05 06 07 08 09 10 11І-ІV 12
Foreign Trade (EUR mln.)Export
Import
-600
-400
-200
0
200
400
600
800
1000
1200
2006 2007 2008 2009 2010 2011 2012
FDI
EUR mln.
August, 2012
Financial Stability – Private and Public Debt
• The economic growth
was fueled by huge in-crease of private debt. The servicing of debts also jumped due to payments of principal, whereas interest represents around 10% of total debt service or less than 2% of GDP
• The Government bud-
get deficit exceeded 2% to GDP in 2011. However, EU methodology is pointing to much higher deficit in 2009 and worst data for the pre-vious years
• Bank loans to corpo-
rate clients are rising, alt-hough access to credits is still difficult to small and mid-sized companies
0
5
10
15
20
25
30
02 03 04 05 06 07 08 09 10 11
External Debt Service
% of GDP
0
20
40
60
80
100
120
02 03 04 05 06 07 08 09 10 11
External Debt (% of GDP)Public
Private
-5
-4
-3
-2
-1
0
1
2
3
4
2007 2008 2009 2010 2011
Government Budget
% of GDP
0
2
4
6
8
10
12
14
16
18
20
3Q 2007 4Q 2008 1Q 2010 2Q 2011
EUR
Billi
ons Bank Loans
Corporates
Retail Exposures
August, 2012
Sources of Growth
• EU funds and large infrastructure projects – total funding
by operational programs in 2012 is close to EUR 1.4 billion, including national co-funding. However, the implementation percentage is between 20 and 30 per cent of the program budgets
• Global inflation and wage growth – the CPI is decelerating recently and is limiting the wage growth while the rising costs for energy and food have negative impact on the liv-ing standards and the ability to pay bills and credits of large proportion of Bulgarian citizens. In this regard inflation could improve revenues of Bulgarian companies which will result to wage growth in many sectors
• Lower interest rates – Bulgarian banks are reluctant to de-crease the interest rate on consumer and mortgage loans. However, rates on corporate credits fell significantly de-spite the increasing level of non-performing loans and its negative implications on profits. It is expected that rates on credits and deposits will gradually decrease this year thus creating positive environment for credit growth
1 340
1 360
1 380
1 400
1 420
1 440
1 460
1 480
1 500
2012 2013
EUR
Mill
ion
Total Funding in EU Structural Funds
6
7
8
9
10
11
12
13
2007 2008 2009 2010 2011 2012
Interest Rates on Credits
Corporates
Consumer
Mortgage
August, 2012
Growth Forecasts
• Bank loans grew faster than nominal GDP before 2010. We
don’t expect sizable increase of credits, which will limit GDP growth. Moreover, with 14% share of non-performing loans the peak of bad loans is yet to be seen. Latest data confirmed that only large corporate credits are contributing to the in-crease of bad loans. The economy is in process of restructur-ing and non-competitive and ill-managed companies will not overcome the crisis
• The contribution to GDP growth was mainly from debt-
sensitive components – consumption and investments. The positive effect from declining import and rising export offset shrinking investments. Considering the expected slow in-crease of bank loans both components will continue to slow down the GDP growth
• We expect the real GDP to grow 2% annually on average dur-
ing the next 2 years, followed by improvement in invest-ments and consumption. However, maximum GDP growth should remain below 4% in contrast to 6% growth during the booming years of last decade
-2
0
2
4
6
810
12
14
16
2004 2005 2006 2007 2008 2009 2010 2011
BGN
bill
ion
Yearly ChangeNominal GDP
Bank Loans
-6 000
-4 000
-2 000
0
2 000
4 000
6 000
8 000
10 000
12 000
2007 2008 2009 2010 2011
Contribution to GDPNet Export
Investments
Government
Consumption
August, 2012
Bulgarian Stocks
Diversified Holdings – representative for the Bulgarian market; very dependent on the market appetite to risk assets; profit is mainly from financial operations:
• Chimimport – 6C4 BU • Eurohold Bulgaria – 4EH BU
Industrial Holdings – majority owners in industrial companies; improving results due to the rising ex-port revenues; mainly traded by local investors:
• Stara Planina Hold – 5SR
Banks – very dependent on the market appetite to risk assets; assessed as very risky due to the high level of non-performing loans; profit is above current losses of bad loans; assets and credits are expand-ing:
• First Investment Bank – 5F4 BU • Central Cooperative Bank -4CF BU • Corporate Commercial Bank – 6C9 BU
Exporters – producers of machinery or raw materials, mainly for EU markets; announced moderate de-cline of revenues due to the slowdown in Europe; stocks are traded at low multiples:
• Alcomet – 6AM BU • Kaolin – 6K1 BU • Monbat – 5MB BU • M+S Hydraulic – 5MH BU • Neochim – 3NB BU • Sopharma – 3JR BU
August, 2012
In Focus
Chimimport – established in 1947; has grown from a foreign trade
enterprise to a large-scale holding company, operating in the financial sector, including banking services, insurance, pen-sion insurance, securitization of real estate; extraction of oil and gas; production of vegetable oils and bio fuels; air, river and maritime transport, port infrastructure
Central Cooperative Bank – ninth largest bank in Bulgaria by as-sets; subsidiary of Chimimport; low level of bad loans as it is focused on corporate clients
Both stocks are very sensitive to liquidation of positions by small and mid-sized investors; recent decline was fueled by de-creased exposure to Bulgarian market by local speculators
The economic model of Chimimport includes aggressive acquisi-tions and large investment projects with low return and de-layed time frame; financial profit from investments in subsid-iaries and bonds are essential for the low P/E
Record low prices could attract speculative demand and would provide ground for strong gains during upward movement of local stocks
0.00
0.50
1.00
1.50
2.00
2.50
3.00Chimimport
12-month price
Price (BGN) 0.88P/E 1.78P/B 0.16P/S 0.36Div. Yield 0.00%
August, 2012
In Focus
Sopharma – the second largest pharmaceutical company in Bulgar-
ia with vertical integration from production to wholesale and apothecary leases; Sopharma is planning to merge with its subsidiaries that produce medicines
The recent exit of Gramercy Emerging Market Funds is a good news in long-term as the largest investor liquidated all its stakes in Sopharma; nevertheless, large block deals are still indicating that selling pressure persists
The valuation of Sopharma is attractive with the combination of low multiples, low risks of revenues and profit decline during crisis and good dividend yield
The new plant for tablets will start production in February-March 2013 and will increase capacity by 35%; the investment ex-ceed EUR 35 million
Latest report showed lower profitability mainly due to temporary and external factors
0
1
2
3
4
5Sopharma
12-month price
Price (BGN) 2.17P/E 7.81P/B 0.94P/S 0.46Div. Yield 3.23%
August, 2012
In Focus
First Investment Bank – the fifth largest Bulgarian bank with large
branch network; it is specialized to corporate credits; 85% of deposits are from corporate clients
The assets of FIB are rising faster than the average for the bank-ing system and gained 19% y-o-y at the end of the first quar-ter; loans and receivables soared 22% at the same time
Equity fell to 7.7% of assets due to the slower increase of equity. This is very low as compared to the Bulgarian banking sys-tem; FIB relies to capitalize profits and is not yet planning capital increase, which could have negative impact on the stock price if announced and should be regarded as buying opportunity
The net profit is declining due to the decrease of net interest mar-gin; as a result, we expect net profit in 2012 to fall to BGN 20 million if impairment costs maintain their level of previous year
Current P/E ratio is very low but will increase to 8 if our expecta-tions for declining profit prove to be correct
0
1
2
3
4First Investment
Bank
12-month price
Price (BGN) 1.45P/E 4.32P/B 0.30P/S -Div. Yield 0.00%
August, 2012
In Focus
Monbat – the largest producer of lead-acid car batteries in Bulgar-
ia has solid market position in Europe; export revenues are 85% of total sales; the group uses 100% recycled lead from its facilities in Bulgaria, Serbia and Romania; revenues de-pend on lead price fluctuations
Consolidated revenues of Monbat declined 12% during the first quarter but started to improve in April; the profitability fell significantly and the company did not disclose the reasons for the large changes in sales to various countries
The stock of Monbat should be regarded as a commodity play; re-cycling of old batteries is improving significantly the group’s profitability as compared to the industry’ average; the effect on profits will be larger in period of rising lead prices
The share was supported by buy-back and the recent decline will either prove to be temporary and the price will return above BGN 5.00 or the stock will find support near BGN 4.00; the latter scenario is more probable
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00Monbat
12-month price
Price (BGN) 4.90P/E 9.49P/B 1.35P/S 1.00Div. Yield 3.52%
August, 2012
Contacts
Tsvetoslav Tsachev Head of Research phone: +359 2 81 000 23 [email protected]
Tamara Becheva Analyst phone: +359 2 81 000 27 [email protected]
ELANA Trading Sopharma Business Towers 5, Lachezar Stanchev St. Tower B, Floor 12-13 1756 Sofia Bloomberg: ELAN GO www.elana.net
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