Monthly Report: June 2016

Transcription

1 Complete research is available only to clients of Dom Maklerski mbanku To access our premium research, log in or open an account at Friday, June 03, 2016 periodic report Monthly Report: June 2016 Equity Market, Macroeconomics Equity Market Investors across the globe are holding off activity in anticipation of the June Brexit poll. Voter surveys leaning in favor of Leave are not eliciting much of a response from stock markets, which means we may yet see a speculative rally in the weeks leading up to the referendum. Sector Outlook Financial Sector The market's main focus in June is on the CHF loan legislation being developed by the Office of the Polish President, expected to continue weighing on the sentiment to the Polish bank sector. By contrast, foreign banks are set to perform by better, buoyed by a strong Q earnings season. Gas & Oil The uptrend in oil is expected to continue in June (falling US production, speculation over OPEC decisions), driving the upside potential of PGNiG, additionally reinforced by expectations of its shareholders pushing for a higher 2016 dividend. We maintain a bearish outlook for PKN Orlen. Power Utilities Electricity prices in Germany continue to rise, driven by commodities and carbon allowances, and this is good news for CEZ (reiterated at buy). In Poland, beneficial changes in the regulatory environment should help lift sentiment toward local utilities, especially TPE, ZEP, and PGE. Telecoms, Media, IT Netia stock is posed for an upward shift in June after the Management's generous dividend proposal is approved by shareholders during the upcoming AGM. Among telecoms, we also prefer Orange Polska, with its better balance sheet and dividend plans, over Cyfrowy Polsat. Our top media pick is Wirtualna Polska, and in IT we prefer Asseco Business Solutions. Resources Weak PMI surveys are confirming a slow global manufacturing momentum, with negative effects on the prices of industrial metals. On the other hand, the Brexit uncertainty is supporting precious metals. Industrials Polish manufacturers delivered their best earnings season in about a year in Q1 2016, with 69% of the companies reporting year-over-year growth and 56% exceeding our expectations. Our top picks for June are Amica, Alumetal, Elemental, Grajewo, Tarczyński, Vistal, and Uniwheels. The stocks to avoid in our view are Forte and Kruszwica. Construction The continuing lull in Polish public infrastructure spending is affecting the 2017 earnings outlook of most construction companies except Budimex and Unibep, who have built thick order books for next year. Property Developers Real-estate stocks have experienced declines on what we consider premature concerns over the government's planned new affordable rental housing scheme and farmland sale restrictions. We would take advantage of the price slump to increase exposure to the sector. Residential developers are expected to report strong sales results for the second quarter. Retail Most fashion and footwear retailers reported weak first-quarter sales, affected by a shopping slump in March. Sentiment in June will be shaped mainly by the new retail tax, expected to take effect in July. WIG... 44,701 Average 2016E P/E Average 2017E P/E Avg. daily trading volume (3M)... PLN 680m WIG vs. CEE indices pts Rating Changes Research Department: Michał Marczak michal.marczak@mdm.pl Kamil Kliszcz kamil.kliszcz@mdm.pl Jakub Szkopek jakub.szkopek@mdm.pl Piotr Zybała piotr.zybala@mdm.pl WIG PX BUX Company Rating Change CD PROJEKT Hold GRUPA AZOTY Buy HANDLOWY Hold KOMERCNI BANKA Accumulate PGE Buy PGNiG Accumulate WIRTUALNA POLSKA Accumulate Michał Konarski michal.konarski@mdm.pl Paweł Szpigiel pawel.szpigiel@mdm.pl Piotr Bogusz piotr.bogusz@mdm.pl

2 Equity Market Early May Brexit polls in the UK, which put the Remain camp ahead, coupled with improved US data, lifted the global risk appetite last month, sending the S&P500 up 1.5% and the DAX rising 2.2%. In spite of rising oil prices, emerging markets during the period underperformed developed markets (with MSCI EM down 3.7% m/m), weighed down by a strengthening dollar and weaker economic data. In Poland, the stock market did not post as big a fall in May as it might have given the lower-than-expected dividends offered by its biggest companies, and, more importantly, considering the government's increasingly obvious designs on pension fund money. All in all, the broad WIG index registered the same drop as MSCI EM, and the WIG20 blue-chip index fell 4.7%. After an April letdown, the Polish economy returned on an upward path in May, validating the 3.5%+ GDP growth target. Against this backdrop, with the zloty still weak, small and mid-sized companies are set to do better than big caps. In June, the announcement of the new version of the FX mortgage conversion bill will weigh on Polish bank valuations. According to insight from global investment funds (high share of cash in portfolios) and sentiment surveys among individual investors, markets at the moment are mostly waiting for the results of the UK Brexit referendum, whose outcome will shape the performance of stock markets in the following weeks. Note that the voter polls in favor of the Remain campaign taken in mid-may triggered a rally on stocks, but the shift in favor of the Leave camp recorded toward the beginning of June sent the markets into a two-day downward correction. Based on this, we would guess that in the time leading up to the referendum we may still see a speculative push upward from the current consolidation range. Whether the upshift is a glitch or the beginning of an upward trend will become obvious on June 24th. A mixed bag of data The latest PMI surveys indicate persistently sluggish growth in global manufacturing output, though contrary to fears expressed at the beginning of the year the slowdown is not yet a recession. In Europe, the weaker PMI readings mark a deceleration relative to the decent data reported in the first three months of the year. Investment remains scaled down both in Europe (including Poland) and in the US as in an uncertain environment businesses are allocating cash toward buybacks and M&As instead, with positive effects on their valuations. In mid-may, we saw a very enthusiastic response from investors to the upbeat April data on US retail sales which remain a key economic growth driver for the country. On the other hand, however, the May Conference Board index at 92.6 points showed its second monthly decline in a row, seemingly breaking off its past high correlation with the S&P500, which has been trending upward since February. S&P500 vs. Conference Board Consumer Confidence Jan-09 Jul-09 Source: Bloomberg Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Conference Board S&P500 2,500 2,000 1,500 1, Brexit uncertainty may trigger volatility The May sentiment survey report by the American Association of Individual Investors (AAII) showed a split between 17.8% bulls to 29.4% bears, with 52.9% declaring neutral sentiment. Conducted since 1987, the May survey showed unusually high levels of neutral sentiment and low levels of bullish sentiment. In the past, similar distribution of sentiment always preceded rapid stock market movements. For example, the May sentiment split is reminiscent of the several months that followed the 1987 stock market crash. At the time, the undecided investors eventually started to buy stocks toward the end of the 1980s, and the US market turned back onto an upward trend which peaked in the 1990s. Between 1987 and 1990, any uptrend in stocks was usually driven by economic growth (fueled by new technology and increasing household debt), underpinned by a series of rate hikes by the Fed (raised from 6.5% to 9.75%; by 1994 rates were down again at 3.0%, resulting in a stock price rally). Further, a high level of neutral sentiment (at 51.3% vs. 25.1% bulls) was recorded in December 2015, i.e. right before stock prices took a downward turn amidst recession worries (falling oil prices, bankruptcy threat in mining). When it comes to institutional investors, their indecision is best illustrated by their high cash holdings (5.5%), approaching the levels seen during the recession that followed the Lehman Brothers collapse. Given the latest Brexit surveys, this uncertainty is sure to persist until the June referendum. Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan

3 AAII sentiment survey Bulls Neutral Source: AAII In Poland, economic data upbeat, political landscape still uncertain The Polish economy recovered in May after a weaker April, with manufacturing (including PMI) and retail sales returning on the growth paths that have been set for them this year. Job growth, coupled with increasing household income, boosted by the 500+ family benefits, should compensate for the slump in investment in the months ahead. Based on announcements issued so far, it looks like listed Polish state companies are planning dividend distributions in a total amount of PLN billion this year an amount which falls quite far off the PLN 5 billion target. This has given rise to speculation that in order to bridge the gap the government may want to dismantle pension funds and consolidate their assets under the management of a single centrally-ran state vehicle. Obviously, this would have implications for the value of Polish equities. Speculation about the future of pension funds is bound to intensify in August, after the government begins its pension system review. Any hint of an economic slowdown or the government missing its 2017 budget targets may signify the beginning of an end for pension fund activity on the stock market. Today, we put the risk of this happening at 50%. Moody's Ratings in May defied the expectations of most by not downgrading Poland's credit ratings, for at least a few days giving more strength to the zloty. Moody's did lower our ratings outlook to negative, pointing out the key risk drivers for the decision; we assume the Agency will take more drastic measures if these risks escalate. The next upcoming agency rating reviews are S&P on 1 July, Fitch on 15 July, and Moody s on 9 September. Michał Marczak tel michal.marczak@mbank.pl 3

4 Previous Ratings for Companies Re-Rated as of the Date of This Monthly Report: CD Projekt rating Buy Buy Hold Accumulate Hold rating day price on rating day WIG on rating day Grupa Azoty rating Hold Hold Buy rating day price on rating day WIG on rating day Handlowy rating Hold Accumulate Accumulate Hold Reduce Hold Accumulate Hold rating day price on rating day WIG on rating day Komercni Banka rating Hold Accumulate Buy Accumulate rating day price on rating day WIG on rating day PGE rating Buy Hold Accumulate Buy rating day price on rating day WIG on rating day PGNiG rating Sell Hold Hold Accumulate Buy Accumulate rating day price on rating day WIG on rating day Wirtualna Polska rating Buy Accumulate rating day price on rating day WIG on rating day

5 List of abbreviations and ratios contained in the publication: OVERWEIGHT (OW) a rating which indicates that we expect the stock to outperform the broad market NEUTRAL (N) a rating which indicates that we expect the stock to perform in line with the broad market UNDERWEIGHT (UW) a rating which indicates that we expect the stock to underperform the broad market EV net debt + market value EBIT Earnings Before Interest and Taxes EBITDA EBIT + Depreciation and Amortisation 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 Dom Maklerski mbanku: 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. mbank S.A. with its registered office in Warsaw at Senatorska 18 renders brokerage services in the form of derived organisational unit Brokerage Office which uses name Dom Maklerski mbanku. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. 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The activity of mbank S.A. is subject to the supervision of the Polish Financial Supervision Commission. mbank S.A. serves as underwriter for the following issuers: Asseco Business Solutions, Bakalland, BOŚ, Capital Park, Erbud, Es-System, IMS, Kruk, Magellan, Mieszko, Neuca, Oponeo, PBKM, Pemug, Polimex Mostostal, Polna, Solar, Tarczyński, Vistal, ZUE. mbank S.A. serves as market maker for the following issuers: Asseco Business Solutions, Bakalland, BOŚ, Capital Park, Erbud, Es-System, IMS, KGHM, Kruk, LW Bogdanka, Magellan, Mieszko, Neuca, Oponeo, PBKM, PGE, Pekao, PKN Orlen, PKO BP, Polimex Mostostal, Polna, Polwax, PZU, Solar, Tarczyński, Vistal, ZUE. mbank S.A. receives remuneration from issuers for services rendered to the following companies: Agora, Alior Bank, Alchemia, Ambra, Bakalland, BNP Paribas, Boryszew, BPH, mbank, BZ WBK, Deutsche Bank, Elemental Holding, Elzab, Enea, Energoaparatura, Erbud, Erste Bank, Es-System, Farmacol, Ferrum, Getin Holding, Handlowy, Impexmetal, Indata Software, ING BSK, Inter Groclin Auto, Ipopema, Koelner, Kopex, Kruk, LW Bogdanka, Magellan, Mennica, Mercor, Mieszko, Millennium, Mostostal Warszawa, Netia, Neuca, Odratrans, Oponeo, Orbis, OTP Bank, Paged, PA Nova, PBKM, Pekao, Pemug, Pfleiderer Grajewo, PGE, PGNiG, PKO BP, Polimex-Mostostal, Polnord, PRESCO GROUP, Prochem, Projprzem, Prokom, PZU, RBI, Robyg, Rubikon Partners NFI, Seco Warwick, Skarbiec Holding, Sokołów, Solar, Sygnity, Tarczyński, Techmex, TXN, Unibep, Uniwheels, Vistal, Wirtualna Polska S.A., Work Service, ZUE. In the last 12 months mbank S.A. has been an offering agent of the issuer s shares in a public offering for the following companies: HTL Strefa, PBKM. Asseco Poland provides IT services to mbank S.A. mbank S.A. has a cash service agreement in place with Pekao and a phone subscription agreement in place with Orange Polska S.A. The present Monthly Report exclusively contains information previously published by Dom Maklerski mbanku and only comprises a comprehensive presentation of unaltered data. The information, including recommendations, contained in the Monthly Report has been published in separate reports, the publication dates of which are located on page 8 of the Monthly Report. In connection with the above, Dom Maklerski mbanku does not consider the Monthly Report to be a recommendation as understood in the Order of the Council of Ministers, dated 19 October 2005 r., in regard to information comprising recommendations concerning financial instruments or their issuers. 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 Dom Maklerski mbanku authorised to access the premises in which recommendations are prepared and/or individuals having to access to recommendations based on their corporate roles, other than the analysts mentioned as the authors of the present recommendations. 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. 10

6 Dom Maklerski mbanku Senatorska Warszawa Research Department Kamil Kliszcz director tel energy, chemicals, power generation Jakub Szkopek tel industrials Piotr Bogusz tel retail Michał Marczak tel strategy, resources, metals Paweł Szpigiel tel media, IT, telco Michał Konarski tel banks, financials Piotr Zybała tel construction, real-estate development Sales and Trading Traders Piotr Gawron director tel Szymon Kubka, CFA, PRM tel Jędrzej Łukomski tel Sales, Foreign Markets Marzena Łempicka-Wilim deputy director tel Krzysztof Bodek tel Anna Łagowska tel Adam Prokop tel Mariusz Adamski tel Tomasz Jakubiec tel Michał Jakubowski tel Michał Rożmiej tel Private Broker Kamil Szymański director, active sales tel Jarosław Banasiak deputy director, active sales tel