Czech Equity Daily: 16/12/2010: KB, ECM, economy

...

Index PX: 1,193 points (up 0.3% d/d); volume: CZK 1,854m (USD 99m)

Market comment
Trading on the PSE was completely under the control of Komercni banka, which at one point reached CZK 4,580. Then sellers arrived but the stock still gained solid 2.4% and closed at CZK 4,515. Erste Bank outperformed most European banks, closing up 0.6% at CZK 856.4. The European banking sector got under selling pressure led by Spanish banks as Spain's debt rating was put on review by Moody's. As a result, Spanish and Portuguese bond yields sharply grew. In the next two days investors will turn their attention to a two-day summit of the EU, which starts today. US macroeconomic data released yesterday were positive – industrial output, the Empire Manufacturing Index and inflation. In Prague, besides both banks, NWR also recorded a nice gain, closing up 2.4% at CZK 248. On the other hand, CEZ fell by 0.4% (CZK 750.1) and CME closed down 3.3% (CZK 372.4) on no news.

KB: Neutral (Analyst: Milan Lávička)
Yesterday Komercni banka's shares grew by 2.4% to a new all-time high of CZK 4,515 breaking the old all-time high (CZK 4,500) set in October 2007, on no fundamental news.

ECM: Neutral (Analyst: Pavel Ryska)
According to CEO of ECM REI Milan Janků, half of the current debt of the company will be converted to shares. However, no specific number as regards newly issued shares was not disclosed. The other half ot the debt will be coverted into Credit Loan Notes – i.e. non-interest bearing debt instruments that will be subject to regular repurchases by ECM, on condition that it meets certain targets of revenue from real estate sales.
We would like to point out that the conversion of bonds into new shares will mean a substantial dilution of the value of current shares. As at Sept. 30, 2010, the company had liabilities from bonds of EUR 117m. If the company wants to convert into shares a half of this debt (EUR 58,5 m., or CZK 1463m.), then, assuming share prices from recent months, it would have to issue something between 10 – 20 million new shares (currently it has 6.9m shares.) However, these numbers are only indicative and the range could be much broader. Please note however that the conversion of debt into equity has long been anticipated and hence the statement does not necessarily have to lead to a large market reaction.

2011 state budget approved
Czech Parliament approved the 2011 budget yesterday, with a deficit of CZK 135bn (3.6% of the GDP) on revenue of CZK 1,044bn and spending of CZK 1,179bn. The total public finance deficit should reach 4.6% of the GDP (approx. CZK 180bn). For this year the deficit had been approved at CZK 163bn. The lowering of the budget can be attributed to spending cuts in the amount of CZK 35bn, which mainly affected the social state, wages in the public sector and reduction in state subsidies related to buildings savings accounts. At the same time economic growth should increase tax revenues. We consider the approved budget as the first step towards more stable public finances.