Revenge of the SIFs

By bne IntelliNews November 7, 2006

Nicholas Watson in Prague -

Romania's regional investment funds that emerged from the 1990s voucher privatisation are easily outperforming the local market. Where do they go from here?

Any investor would be pleased with the 40% gains the Bucharest Stock Exchange has put in over the last year – making it one of the best performing market in the world – but this doesn't compare to the 70% returns that Romania's five regional investment funds, or SIFs, have earned over the same period.

The BET-FI index that tracks the SIFs hit a record 63,531 points on Monday, a gain of 30.2% since the beginning of the year and 73.5% over the last 12 months.

Like the overall market, the BET-FI index has benefited throughout the year from a combination of good corporate earnings; solid economic growth, estimated to be 7% this year; moderate but stable inflation of around 5.5%; and the announcement that the country will join the EU next year.

This last piece of news on September 26 attracted a flood of investment into the stock market. Net investment into Romanian equities totalled €36.6m in October, making it the best month this year after January.

But why are the SIF's doing so much better than the rest of Romania's stock market?

Valuable legacies

The government set up the five regional SIFs during the voucher privatisation of the 1990s and transferred just under a third of all state assets into these funds.

Some of these assets are listed companies, so the SIFs benefit if there is a rise in the share prices on the stock market. However, the funds were also gifted shares of many unlisted companies, including 6% stakes each in the giant Banca Comerciala Romana (BCR). In all, financial institutions make up about 85% of the funds' total assets.

"This is the 800-pound gorilla in the room," says Bram Buring, an analyst at Czech brokerage Wood & Co and one of the few analysts to cover the funds.

BCR is worth roughly €6bn, of which some 30% lies in SIF hands. And it is this, as well as stakes in much smaller unlisted companies worth a total of €90-100m, that give the SIFs their premium.

The SIF index's all-time high was trigged by an announcement by Erste Bank that it wants to buy an 8% stake in BCR owned by its employees, offering them about €6.50 per share. Erste bank wrapped up a €3.75bn acquisition of a 62% stake in BCR on October 12, which it bought from the Bucharest government and others.

SIF 2 Moldova Bacau is the best performer amongst the regional funds, rising 79.4% over the last 12 months and has net assets of RON1.24bn (€353m). Next best is SIF 5 Oltenia Craiova, which is up 68% over the past year, followed by SIF 1 Banat Crisana Arad up 64%, SIF 3 Transilvania Cluj up 54% and SIF 4 Muntenia Bucuresti up 46%.

Some analysts caution these SIFs have risen too far too fast, but few believe they won’t continue to outperform the market.

On Friday, Wood & Co's Buring updated his target prices for these SIFs on the back of the recent rise of Romanian shares.

"The rise in the underlying market is behind the average 12% increase in our target prices," says Buring. "SIF2 and SIF5 remain our favourites; we would recommend SIF1 as it has underperformed the sector as of late and is maybe due to catch up."

The market is also speculating about whether, once Romania joins the EU at the beginning of next year, Erste will make an offer for the 30% of BCR shares it doesn't already own. Some traders are talking about multiples of 5 or 6 BCR shares for each Erste share if the Austrian bank offers equity instead of cash. If that's the case, then the total value of the funds' BCR stakes would grow from today's €363m to €523m, a rise of 44%.

For now, though, the board members of the various SIFs stress they have no intention of swapping their BCR stakes because they are highly profitable and stable investments, providing dividends worth about 40% of profits, much higher than any dividends from Erste would be.

Furthermore, the total 30% stake in BCR also means the SIFs have an effective blocking stake in the bank as well as two members on a seven-member board, which is considerably more power than they would ever hold in Erste should they swap their shares.

The SIFs will eventually sell or swap their shares in BCR further down the road; the only issue is the price Erste will have to pay. However, if the SIFs wish to take part in the upcoming privatizations of Romania's electricity, gas and telecom firms, a process that is expected to pick up once the country enters the EU, they need to raise substantial amounts of funds, which would mean selling sooner rather than later.

Send comments to Nicholas Watson

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