Financial Mirror weekly analysis of the Cyprus stock market
ERM2 & declining rates
Our last week’s scoop on the imminent entry of the Cyprus pound into ERM2 was confirmed over the weekend as the ECB allowed Cyprus, Malta and Latvia to join the mechanism, the prelude to entry into euro-zone in two years’ time.
The fact that the parity rate between the Cyprus pound and the euro was left at the old rate of 1.7086, in place since 1992, is seen as positive since it dashes any devaluation speculation for at least the next two years.
The first major impact from entry into the ERM2 is the certainty that local rates will decline to euro levels in the next two years.
With the Cyprus Lombard (or borrowing rate) at 5.25% while the ECB refinance rate is at 2%, this shows how much room there is for local rates to decline.
ERM benefit
As everybody who has studied economics knows well, when interest rates go down in a stable exchange rate environment, then the ultimate beneficiaries will be the real estate market, equities and high yield bonds.
1) Real Estate: Lower rates will not lead to a boom in real estate prices since prices are already about 100% higher than a couple of years ago, but at least it will ease the downmove or lead to a prolonged period of consolidation.
The fact that from January 2006, loans more than 3 months overdue will be classified as non-performing and amid expectations that banks will be able to amend the law on forced seizures of mortgage property in the event that loans are not settled on time, is seen driving property prices lower during the second half of 2006. The ERM2 news and the prospect of lower rates will somewhat ease the downmove in prices.
2) Government bonds will surge higher on the prospect of lower rates, forcing yields lower, which means institutional investors, including potential foreign investors, will target Cyprus government bonds during the next auctions, as they will rush to lock in at comparatively high rates. Lower yields will reduce the cost of borrowing for the government, which will result in lower deficits, as well as for corporations issuing bonds, which will now borrow at cheaper rates.
3) The Stock market will take some time to react to the ERM2 news, since the prospect of lower rates is seen as negative for the profitability of the banks and until people are convinced that the worst is over. For sure there will be a short-term rally, but it will take some time before investors can say with certainty how the ERM2 news will impact the market.
On the one hand, the prospect of lower rates is definitely a plus for the stock market as investors turn to the stock market for a higher and better return. However, if the majority will first target the bond market, and some the property market, then it will need very good results from listed companies and fat dividends to convince the ordinary folk that investing in the stock market is better.
Upbeat forecast
Laiki Bank (CPB) issued a profit warning for its first quarter results, informing investors that it will easily beat and surpass the first quarter profits of CYP 6.3 mln reported in the same period a year ago and CYP 4.1 mln in the first quarter of 2003.
The profit warning was well discounted and is in line with a similar increase in profits expected for BOC, which is the reason why the share price did not budge last Thursday.
Laiki profits are seen increasing by 30% to around CYP 8 mln according to some analysts in the first quarter, while BOC profits are seen jumping 40% in the Q1 to CYP 14.6 mln from CYP 10.6 mln in the same quarter in 2004.
The profit jump has been widely discounted in the market, which forecasts Laiki net profits jumping by 80% for the whole of 2005 to CYP 38 mln, while BOC net profits for the whole of 2005 are seen up by 55%.
The difference (in favour of Laiki) has been one of the factors why the market has bid up Laiki’s share price by 27% until end of April to CYP 1.43, far outstripping the BOC advance of 20% and the overall GENX, which is up 18% since the start of this year.
As explained in our previous commentaries, Laiki’s share is also up on speculation that if and when the common trading platform is launched, then Greek investors, already loaded with BOC shares trading in Greece will snap up Laiki shares, thus driving the price higher.
Plans by the Laiki Group to float Laiki Hellas, its Greek subsidiary on Sophocleous are also seen as an added bonus, which will boost interest on the stock.
In the event that the market manages to overcome the previous high of CYP 1.49 (holding since December 2002), then the outlook for the stock will improve further for a new target of CYP 1.60.
Earnings reports
The first quarter earnings season will get into high gear with the announcement of results that should give a good idea on whether profitability growth will be maintained at last year’s robust levels for the Main and some Parallel Market stocks.
Alliance Re will be the first among the majors to open the Q1 earnings season when it releases its results on May 10. On May 11, SFS and Muskita will follow, while the highlight of the week will be the release of the first quarter results by Bank of Cyprus on May 12.
The following week, Options Cassoulides will report its results on May 20 for which the company has already issued a positive profit warning, while a week later and on May 25, Hellenic Bank will tell the market how it is doing with or without a new CEO.
Bid interest
Chris Cash & Carry (CHR) confirmed our last week’s report regarding bid speculation by a foreign company, announcing that it is engaged in preliminary talks with a foreign concern for a possible stake by the foreign company in its capital.
Rumours say the foreign bidder may turn out to be Carrefour, but what is more important to the market is at what price such a bid may be made.
It did not come as a surprise to us when market participants heeded our caution and did not rush to buy at 18 cent based on the rumour, after they noted our comment that the stock has been rising for the past two weeks, so somebody knew about the news and was accumulating quietly.
Based on the final accounts of 2004, CHR reported net profits of CYP 1.3 mln and is currently trading on a p/e of 9x while its book value per share is 22 cent for a price to book value of 0.88x.
Steady yield
PHC Franchised Restaurants (PHC) announced that it will pay 0.8 cents per share dividend for 2004, down slightly from the 1 cent paid in 2003, but still acceptable, in view of the fact that its yield, at 3.5% is still good compared to many other titles.
PHC has been among the few companies that listed in the haydays of 1999/2000, but have managed to pay a dividend year in and out. There was no doubt that there would be a small down adjustment in its dividend for 2004, considering that its net profits fell last year to CYP 360,000 from CYP 542,000 in 2003.
Deliberate
Malloupas & Papacostas (MPT) restated its 2004 loss to CYP 3.22 mln from CYP 1.6 mln loss reported at the preliminary stage, blaming the worsening situation on additional goodwill writeoffs as it exited out of more sectors.
During 2004, MPT dumped its subsidiaries involved in the wholesale and retail sales of mobile phones, computers and electricals and disbanded its Service Centre.
The final results showed that book value, down from 35c to 28c at the end of 2004 is still viewed with suspicion in the market, as the share price slipped back to around 5 cent per share.
Sceptics on the other hand, say that the bad news is deliberately blown out of proportion to force the share price down, so that people interested in the company can bid for MPT shares from institutional investors at the current depressed prices.
In fact, we have heard that at least one big pocketed investor has been giving the rounds asking for big lots at 5 cent per share, but we are sure he will pay more if funds hold back.
Negative worth
A.L. Pro-Choice (PRO) also restated its 2004 results, reporting that net losses amounted to CYP 2 mln, which further compounded the difficulties facing this company.
The 2004 performance means that the accumulated losses, which have surged to CYP 15.8 mln, far outstrip the original capital of CYP 13.5 mln, leaving a net negative balance of CYP 2.33 mln or minus CYP 0.035 per share.
Under normal circumstances, the share price should have been zero, since it cannot go below zero, and not CYP 0.02 as it is now being quoted.
