TRENDS

Reigning supreme
Budapest bourse closes a successful 2003
Written by Kester Eddy

The Budapest stock exchange, one of the world’s best performing bourses in 1996-1998, slumped badly each year in the new millennium. But in the past 18 months interest has again began to pick up. Last year two new companies were listed - the first for several years - and the Bux index, the basket of the most important shares, finished trading in December at 9,380, up 20% on the year. That was on top of a rise of 10% in 2002. The question now is, in the year of Hungary’s EU accession, can the BSE continue growth, and if so, how?

Gedeon Richter, the Hungarian pharmaceutical company, is located in a less than attractive area of town. Driving toward Ferihegy airport, as you climb up the flyover near Kôbánya-Kispest railway station, look to the left and you may see its RG trademark on a big utilitarian box of a building half a mile distant, across an industrial landscape of railway lines, factories and warehouses, many abandoned and vandalized. Hardly a prime location. But Richter shares last year certainly proved to be a prime location for savings. The canny investor who pumped a million forint into Richter stock in December 2002 could have taken out HUF 1.65 million this new year’s eve, a spectacular return in just 12 months. The rise in dollar terms, due to exchange rate moves, was even more flattering, the share price soaring from USD 66 to over USD 118, a gain of 70%.

The Budapest Stock Exchange was a top performer in 2003, leading the list of regional bourses

True, Richter, of the larger stocks, was the exceptional performer and the main buoyancy factor in the 20% rise in the Bux index. So while Budapest failed to match the strong gains in New York, where the market was up 26%, it was still better than London, which rose only 13.6%. And against neighbors such as Ljubljana (up 17%) and Zagreb (up a mere 1%), Budapest reigned supreme.
It’s also true that had the same investor placed faith in fellow drug producer Egis then the shine would have been taken off the New Year celebrations. Egis slumped 39% last year, the drop caused by its Finnish partner ending trials on an anti-anxiety drug. Matáv, the dominant telecom provider, was also down slightly, its value trimmed 3%, but solid performances by OTP Bank and Mol, the oil and gas company, left these stocks up around 20%, in line with the share index.

Change in investors’ structure?
Sad to say, but relatively few Hungarians shared in the stock market gains. Foreign investors - mostly funds - own about 75% of the stock on the exchange, and although the share issues and bull run in the mid-90s attracted many local individual investors, the subsequent slump at the turn of the millennium saw the majority quit the market. And in Hungary, pension and investment funds, significant shareholders in most public companies in the west, are very cautious when it comes to equity investments.
" Most pension funds are conservative, investing 10% or less in stocks. This compares to 30% in stocks by Polish funds," said Peter Holtzer, chief executive of OTP Fund Management, the largest in Hungary. However, returns on bonds have been very poor this year, which may coax more fund managers to increase the proportion of stocks held. Indeed, Holtzer is looking to up the proportion of equities in OTP pension funds from 15% last year to 25% this year. Yet one of the problems for local fund managers is a shortage of good Budapest stocks with enough free float to guarantee liquidity, enabling them to easily sell their holdings if they so wish. Although two new companies began trading last year, well over a dozen turned private in the difficult years of 1999-2001.

BSE chairman György Jaksity

The club
György Jaksity, BSE chairman since mid-2002, has founded a "club" to assist companies thinking of joining the bourse as part of his long-term revival plans for the bourse. "The significance of this club, which now numbers 20 members, is not in the first instance to have the company listed. What it [first] creates is the notion that if you invest into things that lead you to listing, you will have a return," says Jaksity. He argues that if companies chose high-quality auditors and advisers, as they would for a listing, this in itself is of value, helping in areas of corporate control and operations. "Auditing has become a sophisticated process. It provides you with contributions beyond just signing off the accounts. It tells you your controlling is not really working, or your risk management is nowhere. So you actually get something for your money, beyond a listing, or signing off on your accounts," he says.
The philosophy behind all this is to create companies of excellence, which will be companies of premium value, and ideal for listing. "Should companies hire an auditor or an environment specialist for the sake of the stock exchange? No! They do it for their own sake, for their own benefit, for a higher quality company. There must be a return on expense or investment," Jaksity says.
Companies in the club adhere to this credo, Jaksity insists. "They openly say they are not here because they want to get a listing in the next six months. They come because it’s good publicity, and they can say ‘We are different’!"
But there is the rub. Even the biggest of the twenty, companies like industrial group Wallis Holdings, commercial TV broadcaster RTL Klub and KFKI, the systems integrator, are not likely to list in the imminent future. Jaksity, ever the evangelist, is undismayed. "This is a long-term exercise with mutual benefit. If even just one company comes out of this club and wants a listing, I think it will be absolutely worthwhile doing it." Perhaps the BSE’s best hope for progress this year - apart from the share offerings promised by the government (see box) - lie in the effects of EU accession.

Traders expect the BSE to be very lively in the months running up to Hungary’s May 1, 2004 EU accession

What comes after EU accession?
Budapest shares trade at a price (of shares) to company earnings ratio of 10 or 11. The P/E ratio is an average of 18 or more for companies in the European Union, Jaksity says. In other words, Hungarian companies, in general, are cheap. This is a reflection of the risk attached to the "emerging markets," the label used to describe stock markets outside North America and the developed world. With EU membership, that should steadily disappear.
" There is the potential for Hungarian market to go up by some 50-80%, on top of its own internal growth, just because of the equity risk premium compared to Europe," says Jaksity. But as head of Concorde Securities, the largest of the homegrown brokerages, he would do well to say that.
To some extent, however, other analysts agree. ING Bank, in a report late last summer, put Mol as a "Strong Buy" with a target price of HUF 8,200 when the stock was then HUF 5,500. Mol ended 2003 at HUF 6,315, still 30% short of ING’s evaluation. RZB Group (Raiffeisen Bank) said last November it expected the "EU accession fantasy - which is no longer a fantasy," to last until shortly before EU membership, after which the BSE will "take a little breather." Erste Bank analyst Tamás Pletser is more cautious, warning that investors are concerned about the government’s commitment to reining in the budget deficit and ensuring economic stability. Speaking shortly after the economic measures in December, he said 2004 "could be crucial," with deterioration in investor trust in the policy makers. However, if the authorities can re-instill confidence, more investors would return. "I’m cautious, but on the other hand if the European economy, especially Germany, picks up, that could have a big effect [on the bourse]. I’m sure, with a P/E average of 10 or even less at the moment, we would then see the Bux immediately go over the 10,000 level," he said.

New listings in 2004?
Szerencsejáték Rt. is considered the most valuable state-owned company in Hungary

Prime Minister Péter Medgyessy promised when taking office in May 2002 to re-invigorate the Budapest bourse. To some extent, the Socialist-Free Democrat government has lived up to this promise. It enacted regulations that eliminated investor fears regarding gas prices and their effect on Mol. Perhaps even more significantly, last year saw two new companies listed on the exchange, Forrás, the asset management company, and FHB, the mortgage bank.
However the failure of the Mol share offering, scheduled for early December but pulled at the last minute due to low bid prices (caused by currency uncertainties undermining investor confidence), was a big disappointment. Finance minister Csaba László, speaking after the announcement on Mol, promised to continue privatization in 2004, hinting strongly that the 25% state-owned stake in Gedeon Richter would go on the block.
However Ákos Macher, deputy CEO of privatization agency ÁPV Rt., speaking on Christmas Eve, said that this year's main targets would be national airline Malév, a group of state-owned agricultural cooperatives, broadcaster Antenna Hungária, and the postponed MOL sale. Of these, only the latter two look certain to boost the exchange.
Perhaps even more ominously, parliament - in voting on the budget for this year - vetoed the sale of Szerencsejáték Rt., the state gaming company, to the dismay of György Jaksity, BSE chairman. "This is a big company, it’s a HUF 130 billion enterprise. It is THE best [state-owned] company, by far [for privatization]. I personally have done a huge amount of lobbying to get this company listed, and it’s in the finance ministry’s proposal for the budget every year, and then it’s pulled out by the MPs. Whatever is ideal for investors is ideal for politicians, too. Both are looking for the same thing in a company, money," Jaksity said.
Asked about parliament’s decision to hold onto Szerencsejáték, finance minister Csaba László appeared disappointed by the vote. With a sigh he said, "Maybe we cannot guarantee another 45 week jackpot. That very much decides the profitability of the company. But I don’t really want to comment."