Romanian SIFs - August 2008

IULIANA SIMONA MOCANU - Head of Research Department RAIFFEISEN CAPITAL & INVESTMENT S.A.

 

Go for bottom fishing!

Investment case: With the BET-FI (the SIFs index) plunging 60% YTD, question marks must have been raised about the intrinsic value of the SIFs portfolios. Due to their scale in the SIFs portfolios, there is no surprise that the biggest issue is each SIF stake in BCR. Therefore, we valued BCR and implicitly the SIFs themselves from different perspectives, given different degrees of optimism/pessimism while keeping in mind that SIFs are enjoying extra rights compared to an ordinary minority shareholder in an unlisted company (owing to their latent blocking rights). As investors’ mood darkened, we also grew gloomier, therefore all our scenarios are more pessimistic compared to our previous report. Nonetheless, we discovered that under all scenarios the SIFs are trading at significant discounts to their NAVs. We ran even a stress test (BCR valued under our most pessimistic scenario combined with an assumption of a further 20% drop of the listed shares) which gave us confidence that the market has been too harsh with the SIFs shares.

Valuation and recommendation: In terms of the methodology employed to assess the value of the SIFs portfolio, this update does not bring any change, as we still use a Sum-of-The-Parts (SOTP) method. We mark to market the listed portion of their portfolios but we rely on the reported figures for the unlisted part (the official methodology in this respect being rather conservative) with the two known exceptions: BCR and Bancpost stakes. The value assigned to BCR and used to determine our target prices is derived with the help of the 2008e trading multiples of the listed CEE banks. Consequently, we set the following target prices and keep all five SIFs on our Buy list:

• RON 2.90 for Banat-Crisana (SIF1), with an upside of 92%; Buy
• RON 2.77 for Moldova (SIF2), with an upside of 76%; Buy
• RON 1.78 for Transilvania (SIF3), with an upside of 114%; Buy
• RON 2.05 for Muntenia (SIF4), with an upside of 101%; Buy
• RON 3.29 for Oltenia (SIF5), with an upside of 102%; Buy

 

 

Valuation

We employ the same methodology, namely an SOTP, to value the SIFs’ portfolios and to establish our target prices. We split SIFs assets into four main classes: (i) listed shares, (ii) unlisted shares, (iii) cash and T-bills and (iv) other assets. After assigning a value to each asset class and summing them up, we get to the NAV of each SIF by subtracting their debts (we adjust the reported debts with our estimation for the deferred tax liability).

For each SIF, the latest holdings of listed shares are marked to market while the less liquid shares (the ones not traded for the past 90 days) are penalized by applying a 50% discount to their most recent closing price.

For the other asset classes, including the non-listed shares, we use the figures from the SIFs filings with the National Securities Commission (CNVM) but with two noteworthy exceptions: the Bacpost and BCR stakes which are valued separately, as it will be detailed further. We remind investors that according to local regulations, the unlisted shares are held at cost which in the vast majority of cases is an “inherited” one.

Our target prices are derived by applying a 15% discount to the NAV obtained with the above described methodology.

BCR stakes

It is almost common sense that BCR valuation is the key to determine a fair value for the SIFs’ NAV, given the weight of these stakes in their total assets. We will pursue different approaches to the valuation of the BCR stakes, each assuming a different degree of optimism/pessimism. Our aim is to check if the market was right when it hammered their shares or whether they could be considered as attractive bargains at the current price level.

We remind investors that thanks to the provisions from BCR’s privatization contract and the bank’s bylaws, SIFs are entitled to extra rights compared to a customary minority shareholder of an unlisted company, as long as they stick together. To smoothen the privatization process, SIFs gave up their 25% blocking rights in the bank’s GSM, in exchange of Erste’s commitment to list BCR by October 2009. If BCR is not listed, Erste will be legally bound to hold an EGSM and to restore the 25% blocking rights clause. Until BCR shares will be floated, the bank has to pay out at least 40% of its profits as dividends and, moreover, the SIFS have the right to appoint two of the seven members in BCR’s Supervisory Board. Therefore, with Erste currently owning 69.3% of BCR, it needs only one SIF to sell its stake so that the Austrian-based bank will lack any incentive to list BCR and will not be bothered by the blocking rights (each SIF has a 6% equity interest in BCR).

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