Bulgaria's stock market set for busy 2007

By bne IntelliNews February 12, 2007

Rob Whitford in Sofia -

They may not be quite all the rage in Bulgaria just yet, but along with the explosion of real estate investment trusts (REITs) and a tripling of mutual funds’ assets under management, sizeable IPOs were the novelty of 2006 on the country’s still small but fast developing bourse. And there’s every indication that IPOs are set to become still more prominent in 2007.

The novelty was not complete since there had been a few IPOs before spring 2006. But they’d been small affairs, largely valued at below BGN1m — or at the very most BGN2m — and conducted by small internet or media companies, mostly by way of stock-exchange auctions rather than subscription. Then, in April 2006, the fun really started.

First came the Bulgarian-American Credit Bank with a hefty, albeit secondary, offering that floated 3.0% of its shares and raised a cool BGN108m for this rather dynamic US-backed and small business-oriented bank.

Then in July, there came an IPO from Advance Equity Holding – established by the heavyweight local brokerage and investment group Karoll, which is a private equity firm and therefore itself quite a novelty on the Bulgarian scene. An IPO in the strict sense, this broke the double-figure barrier for the first time, raising BGN10m.

This was followed in September by Chimimport, Bulgaria’s biggest holding company and the main vehicle of the powerful Varna-based TIM Group, arguably the most solid, disciplined and modern of the country’s “post-communist” business formations. Chimimport has controlling interests in a bank, an insurance company, an oil and gas exploration company, two pension firms and various transport firms including an airline, to which it's since added the national carrier Bulgaria Air by winning the recent privatisation tender. It’s no surprise that investors saw Chimimport as a bandwagon worth climbing onto.

Aimed at expanding and rounding out its financial sector activities, the IPO raised BGN44m, with 2.5-fold oversubscription and a subsequent 90% rise in the share price over the IPO level of BGN4 per share. New shareholders have a combined stake of just under 10%.

Finally, there was the only slightly smaller IPO of Monbat, the car-battery producer based in the town of Montana in northwestern Bulgaria. Monbat is majority owned by “local hero” Prista Oil, which – allied till recently with Chevron Texaco – has maintained a dominant position on the country’s motor oils market and expanded impressively into other Southeast European countries.

Monbat’s IPO raised almost BGN33m, with the share price closing 41% above the offering’s price on the first day of trading in January. So far they’ve shown no tendency to drop. The proceeds will come in handy for expanding capacity in Montana and for building recycling facilities – including one in Serbia – that will shield Monbat from the vagaries of the world lead market.

As far as IPOs are concerned, therefore, BSE is evidently a voracious market and one that can yield some very nice surprises for issuers given that demand for shares is healthy and will continue to be so, for several reasons.

The EU effect

First, the resources in the hands of local investors are increasing fast. Aside from those dynamic mutual funds, there are the country’s private pension funds, whose assets topped BGN1.5bn by end-2006, 37% up year-on-year, with significant liberalisation of permitted investment structure over the last year meaning that their potential demand for high-quality equity rose still more sharply.

Second, foreign investors see promising returns from Bulgarian equities. “Certainly, the lion’s share of the new issues is sold to foreign investors, since local players could not match the whole quantity supplied,” says Hristo Valev, an investment analyst with the local financial services firm Karoll.

Indeed, foreign investors snapped up 85% of the BACB issue and accounted for 58.7% of the BGN3.38bn worth of securities transactions on the BSE in 2006, so international investment funds and global investment banks are already looming large on the Bulgarian market.

Third, they may loom larger still. With Bulgaria’s accession to the EU, the country's equity market has come within the purview of certain investment funds whose mandate excludes them from investment in non-member countries.

Liberalisation also means that EU-based brokerages can now work in Bulgaria with no separate licence by just registering with the sector regulator for the purpose, which 13 apparently did in the first couple of weeks of 2007 alone.

And moves are afoot that could integrate BSE more closely into a wider European bourse system: having steered through the necessary legal changes, the government is mulling sale of its 44% stake in BSE, with a strategy due in a couple of months and a deal quite likely by end-2007.

Suitors are not lacking. Those who have so far signalled interest include Deutsche Boerse, Athens operator Hellenic Exchanges Holding, the Vienna and Warsaw bourses, and Nordic Exchange operator OMX. The Greeks are, in addition, suggesting that BSE should adopt the common trading and settlement platform on which Athens and the Cyprus stock exchange have been operating jointly since October last year. All of which should improve the access of foreign money to Bulgarian markets.

On the supply side, the advantages are obvious. Provided you’ve got your act together in terms of corporate governance and transparency of accounts and structures, IPOs on such a receptive market mean cheap money, without the tedious business of repayment or debt service. And the process of preparing for a Bulgarian IPO prepares a high-flying corporation for the logical next stage of an offering on foreign markets.

Finally, IPOs are good for the market as a whole.

“The BSE still lacks sufficient liquidity,” notes Valev. “The arrival of new companies with quality fundamentals is a good sign for the direction of development of the market."

IPOs will also encourage “long-term interest from investors abroad who will closely monitor the market,” says Tsvetoslav Tsachev, head of research at local brokerage Elana.

And, at least for now, there’s probably no corresponding downside, argues Tsachev: “Buyers at this moment are not mainly short-term speculators. Most of the capital in Bulgaria is here to stay, not to use one-time opportunities. And that’s why investors are buying shares with high price/earnings ratios."

But Tsachev doesn’t exclude volatility ahead. “On the contrary. There’s a lot of easy money looking for stocks and things could become ugly if emerging markets start to fall,” he warns.

Small but growing

Let’s not overdo things, however. In terms of money raised, the offerings discussed above yielded a tad less than BGN200m.

Bank financing has traditionally been the most popular source of capitalisation for the Bulgarian companies and, according to Tsachev, that isn’t to change anytime soon. “Credits are and will remain the source of capital. Many companies issued bonds due to the limitations of bank credits imposed by the central bank, but the credit growth calmed and they will return to credits.”

Valev seems to agree, saying that with falling interest rates due mainly to risk-premium compression, bank loans still remain fairly attractive to firms.

IPOs also need a lot of preparation in terms of carrying out all the necessary reforms in the organisational, managerial, and legal structure. Procedures are a little cumbersome, with the preparation of an IPO taking anywhere between three and six months. Efforts are underway to shorten this period, “in order to accommodate increasing interest and correspondingly stronger deal flow,” says Valev.

So, for now, IPOs are not for everyone. Nevertheless, prospects are brisk. “At least 10 new IPOs are expected in 2007, including 4-5 large ones,” says Valev. “Well-known companies from a variety of sectors have already declared their willingness to go public and are well advanced in the preparation of their listings.”

Indeed. Those preparing for IPOs – or mulling them out loud — include upmarket wine-maker Todoroff, which would become the first company in the food and beverage sector to IPO; minerals firm Kaolin, which has taken the first steps towards raising BGN30m via IPO; Net Info BG, which is on track to become the third internet IPO; meat-processor Mekom, which has been integrating its operations prior to a bond offering or, more likely, an IPO in late 2007 or early 2008; and Austrian-owned copper producer Asarel Medet, which is talking of an IPO two or three years down the line when its modernisation process has been completed.

Send comments to Rob Whitford

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