Small caps spurn PSE, head for Warsaw alternative

Illustrating the sentiment, brokerage house Cyrrus confirmed market rumors about its plan to help the smaller Czech companies float on the WSE. However, the preferred destination is not the main WSE platform. It is instead the WSE New Connect Exchange, a market that now boasts 50 companies since its opening last August and that is specifically designed to serve the needs of the small caps, or stocks with a relatively small market capitalization.

“It’s true, we are considering debuts from two energy sector companies and one in a line of business that I cannot reveal at the moment,” said Jan Prochazka, head of research at Cyrrus. Companies that opt for New Connect are generally seeking to raise capital of approximately Kč 70 million (€2.8 million), he added. “With no satisfactory offers arising from the private equity market, we can certainly expect debuts on the New Connect in Warsaw within the next six months, with the earliest occurring this summer,” Prochazka said.

The consensus of analysts right now is that the PSE—which lists 33 stocks compared to the WSE’s 364 and which only saw two initial public offerings (IPOs) last year compared to the Warsaw bourse’s 81—is not even placed under consideration as an alternative source of capital for companies wishing to push ahead with IPOs worth around Kč 100 million or less. Only large, powerful companies like NWR—which raised around Kč 35 billion from its three-point IPO in Prague, London and Warsaw—can attract the money of reluctant Czech investors. Even last year’s IPO of used car dealer AAA Auto, worth around Kč 1 billion, was considered by some analysts as too small to win the attention of local investors.
Josef Nemy, equity analyst with Komerčni Banka (KB) said that the problem lies not only in the aversion of Czech investors to the higher risks inherent in investing in small caps, but in the fact that the proper market infrastructure is missing. This means that in Prague there is no specifically designated trading floor for small but dynamic companies like that of New Connect and London’s Alternative Investment Market (AIM).

Who is headed for Poland?

Market speculation over the identity of the two energy sector enterprises referred to by Cyrrus as potential candidates for New Connect takes into account that the energy business is capital-intensive and typically requires more than Kč 70 million per project. Therefore, suggestions as to who the companies are range over local energy suppliers through to power stations and renewable energy companies, namely enterprises that do not need sizable investments in order to operate.

One concrete name in circulation is that of Moravia Energo, an energy trader and distributor operating in the Czech Republic but present also in Poland. Energo Moravia already retains Arca Capital as a financial investor. Last year, Arca bought up 31 percent of its shares. Energo Moravia plans a Kč 2 billion investment in a steam-gas power plant in the industrial park of  Prostějov, Central Moravia. Considering the company operates in Poland, it could make use of New Connect not only to raise a proportion of the money but also to help market itself and gain some prestige, KB’s Nemý added.

Both Arca Capital and Moravia Energo did not answer questions put to them on the matter by CBW.

New Connect’s simplicity praisedMarcin Mandziak, deputy chairman of MW Trade, the third-largest company listed on New Connect, observed that many enterprises treat the market as a stage to be gone through in preparation for arrival at their intended final destination, the WSE trading platform. “Following the year that has passed since our New Connect debut, there is time to spread our wings and enter the large market,” he said.

Mandziak said he is very pleased with the effects of the New Connect listing for his company. He praised the simple procedures required before the debut. These take just two months instead of the five months in the case of the WSE main platform. Fewer information disclosure requirements and lower costs were also mentioned by Mandziak as advantages. A short information memo suffices instead of a prospectus, while there is no need to publish quarterly financial results. Charged costs run at 3.5 percent to 6 percent on issues as small as Kč 20 million-30 million.

Looking at disadvantages, Mandziak only identified low market liquidity and the shortage of capital, as 92 percent of the investors are individuals. Analysts note that the financing of big projects via New Connect will be possible when mutual and pension funds adjust their internal rules to make investing on this market possible.

Listing would be a foreign first

If a Czech company does indeed list on the New Connect in the not-too-distant future it may become the first foreign enterprise to be listed there. Some difficulties in attracting Polish individual investors to its offer would clearly have to be addressed. “But if the company has a brilliant business idea and a niche product, it will succeed no matter whether it’s from Poland or from another country. The only problem would be communication with the Polish market participant. Technically, it is enough to report in English, however, practically Polish is necessary too,” Mandziak continues.

Among the companies mentioned by analysts for possible floatation in Prague in 2008 are IT firms ICZ and AVG Technologies (formerly Grisoft), nanofiber technology producer Elmarco, transportation company Student Agency, logistic company CS Cargo, real estate business CTP Investment and financial service firm CSS group. Of these companies, analysts point to only ICZ and Student Agency as suitable for New Connect in terms of size and business concept.

Airport operator Letiště Praha and national carrier Czech Airlines (ČSA) are in the process of being converted into joint-stock companies before they are privatized. While floatation on the stock market has not been ruled out, it is likely that stakes will instead be sold to strategic investors (see “Hawks circling round Ruzyně airport,” CBW, May 5, 2008).

Just two Czech companies are currently listed on the WSE, specialty textile maker Pegas Nonwovens and power company ČEZ.

Explaining the much greater dynamism seen at the WSE as measured against what is encountered at the PSE, analysts say that the WSE, which aims to be the biggest exchange in Central and Eastern Europe, benefits from cash-rich pension funds. Polish pension funds manage zł 140 billon (Kč 1.03 trillion) worth of assets. Approximately 35 percent of this is pumped into the WSE. “For many years, interest rates on loans have discouraged companies from seeking equity capital on capital markets,” said Petr Novák, an analyst with brokerage Atlantik financni trhy. When asked whether we can expect some fresh wind on the PSE and whether it will start to compete with the WSE and the larger European stock exchanges, he said, “I don’t think this will happen in the near future.”

Atlantik finanční trhy belongs to the Karel Komárek
group of companies, which includes Stanford,
the publisher of this newspaper.