BULGARIA Investment Opportunitiesanalysis.elana.net/upload/2012-Bulgaria-Investment.pdf · August, 2012 Inflation and income • The crisis in domestic demand resulted to sub-dued

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]

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