The Correlation Between Stock Exchange Performance and Financial Results Throughout the Crisis
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In Romania, the economic and financial crisis started at distinct points in time for the stock exchange and for the overall economy. While the stock exchange faced the cash crunch at the same time with the explosion of the subprime bubble in the United States, in mid 2007, the actual economy has not experienced serious difficulties until September-October 2008. Another discrepancy resides in the fact that the stock exchange has gradually entered a downward slide, while the economy has suddenly collapsed, without going through an intermediate phase.
Obviously, some companies have been more affected by the macroeconomic crisis than others, while some managed to even benefit by the opportunity to boost their market share. However, the badly impaired companies have not always been the ones to undergo dramatic declines on the Stock Exchange. Likewise, not all the companies that have posted good financial results managed to perform well on the Stock Exchange as well. A rather obvious example would be the banks, which managed to remain profitable and will probably reap profit in 2009 as well, nonetheless, their stocks have had poor performances on the Stock Exchange. There are also issuers with a similar performance on the Stock Exchange and in the corresponding industry. Impact real estate developer is a perfect example, the company’s plunge on the stock exchange following closely the downward trend of the real estate market.
Furthermore, Impact has been the worst affected company on the main market operated by BVB, having plunged by 98% since the start of the stock market downfall (July 24, 2007, a date when historical highs were reached by BVB indices and by most of the quoted stocks) and until today. The real estate developer is now valued at EUR 7 mn, about as much as a residential neighbourhood built by the company. Fears regarding the crash of the real estate market have led to a slump in the price of its stock, many investors questioning the company’s capacity to overcome the crisis. Nonetheless, if Impact manages to surmount the economic difficulties, those who hold IMP shares in their portfolio will earn a small fortune.
Turbomecanica and Dafora shares have also been significantly affected by the current circumstances. The former has started to incur losses even before the moment when the financial crisis has entered Romania. Starting with Q4, 2007, the company has been running at a loss and many investors decided to discard this stock, even though, for several years in a row, Turbomecanica had one of the highest dividend yield ratios among companies listed on the Bucharest Stock Exchanges.
The latter runs major businesses in the real estate sector and had huge market multiples in 2007 due to the hike marked by its shares on the Rasdaq market. Dafora was one of the beneficiaries of the boom experienced between 2006 and 2007, when all investors were keeping an eye on the Rasdaq market, and share capital increases carried out by issuers listed on this market used to entail sharp rises in the price of shares, everybody expecting the money to be used with a spectacular profit margin. The financial crunch followed by the economic crisis led to steep drops in quotes, Dafora being among the most affected with a fall of 97.5% in less than two years. The other company in the group, Condmag Brasov, also slumped by 94% in the same period, thus the fortune of its majority shareholder decreasing from some EUR 200 mn to only a few millions.
Nevertheless, Dafora is one of the companies listed on Rasdaq that, after having been worth tens and hundreds of millions of Euro at the market price, witnessed a fall of 90% as the money that had artificially inflated prices started to evaporate from the market. The same thing happened to Celule Electrice Bailesti (-98.6%), Imotrust Arad (-97.6%), Comnord (-96.8%), Edil Constructii Arad (-96.5%), IAR Ghimbav (-96%), Armax Gaz Medias (-95%), Concefa Sibiu (-95%), Prospectiuni SA (-94.9%), Mittal Steel Roman (-94%), Iproeb Bistrita (-92%).
The correlation, or lack of it, between the evolution of issuers’ shares on the stock exchange and the one of the actual businesses has depended heavily on the prices reached by each company in mid 2007. As it is known, 2007 was a year when the issuers listed on Rasdaq were the rising stars of the Romanian stock market. Many investors considered bluechip companies to be overvalued and turned their attention to a series of smaller and apparently less dynamic companies on the Rasdaq market, these coming to be more traded than issuers listed at the first tier on the Bucharest Stock Exchange in a number of trading sessions. Naturally, from P/E ratios of 200 reached after the massive purchases made throughout that period, it is normal for the drops to be even more dramatic even if the economic performances were rather good.
Another category of companies that have decreased sharply throughout this economic and financial crisis was the one of financial investment companies. The only issuer of this type that managed to stay afloat during this period and under the -90% threshold is SIF Muntenia, the rest registering minuses of up to 93%. In the case of SIF Muntenia, the small decrease in net asset, compared to the other financial investment companies, due to investments made in bonds and bank deposits, has contributed significantly to maintaining a relatively stable price. On the other hand, the other financial investment companies have felt the double effect of the stock exchange crash, firstly because of the plunge in the value of stakes held in their portfolios, and secondly because this slump had a direct impact on SIF stocks quoted on the same market. Nevertheless, paradoxically, the five investment companies managed to remain profitable, at least on paper. Only SIF Moldova set up considerable provisions for the depreciation of assets held in its portfolio, the rest preferring to cut from the balance sheet reserves and not affect the profit and loss statement, a strategy approved by the Ministry of Finance as well. Another company with activities similar to those conducted by SIFs, SSIF Broker, has suffered an even more dramatic decrease, of over 96%, in this case the difference between the net asset and market capitalization being smaller compared to the other five companies. SSIF Broker’s net asset was more affected than the ones of SIFs because the former comprises mostly of stakes in companies listed on the Bucharest Stock Exchange. Last but not least, SSIF Broker Cluj carries a higher risk factor represented by debts while SIFs do not.
Apart from companies that have slid by 80-90% there are also issuers that have managed to maintain their initial market value. Such an example is Titan SA, whose shares have decreased by 20.6%, following the company’s sale and the initiative of the new majority shareholder, LLI Euromills Gmbh Vienna, to buy large stakes remained from other shareholders. Furthermore, the company’s low free float, of only 2.4%, has contributed greatly to this state of affairs. Another relatively small decrease, of a mere 35%, was marked by Prodplast, however, the company is suspended since September to be split in two distinct entities, one for production and one for the real estate sector, thus managing to avoid the intervals when BSE plunged the most.
