Volatility in the markets
It has been a wild ride for global investors over the past weeks. Markets rocked with further volatility, spurred primarily by the US sub-prime credit situation as investors are convinced that the problems are spreading to other areas of the credit markets. Crude oil and other energy futures fell sharply in the beginning of this week, extending their steep losses from last week, as energy traders worried that a slowdown in the US economy will lower demand for oil.
We have been seeing a heavy sell-off in more risky assets, like Hungarian equities, and a shift into those perceived as "safe havens," such as bonds.
Similarly, jittery investors have also dumped some of their riskier bets on emerging currencies, as the Turkish lira led a decline in eastern Europe's currencies. The lira fall against the euro took it close to being its weakest in three months, leading the currencies of Poland and Hungary lower as well.
MOL NyRt, Hungary's oil and gas refiner, will publish its second quarter earnings today (Thursday, Aug 9). Cashline Securities analysts expect that the company will be hit by its weak upstream operations (drilling and exploration of oil and gas fields that bring raw materials to the surface); the weak US dollar (oil companies earn in dollars); flat crude oil prices; and a mild winter which has eased demand for natural gas production.
We still maintain our recommendation to hold the shares as the current trading is still more determined by speculation of a take-over bid by Austrian competitor OMV AG. If we were looking at the company on a pure fundamental basis, we would set Ft24,000 ($132) as a target price for the end of 2007, but the chance that OMV could make a public offer supports the current price, where MOL has been trading at up to Ft28,000 ($154) for the last few trading sessions.
Magyar Telekom (MTEL), the Hungarian mobile and fixed line company, will also report earnings today. We maintain our conservative accumulation recommendation, as the share price has declined considerably to more attractive buying levels. In the past month we saw the price fall from Ft1,006 ($5.53) to the range of Ft935-950 at which is currently trading.
Second quarter earnings are expected to bring no surprises, and if the shares decrease to close to Ft900 ($4.95), I would consider that as a good entry buying signal.
Profit contribution
Budapest-based Richter Gedeon NyRt, the biggest eastern European pharmaceutical company, has announced it acquired 70% of Strathman Biotech in Germany, of which 3% is going to be held by Helm, a Germany-based firm. The value of the deal is E22.9m (Ft5.7bn).
However, it will be official only after formal approval from the German authorities, which should arrive within a month. Based on the first unofficial information, the biotech company could generate a maximum of a few billion revenues in forint terms, while its profit contribution could reach to Ft300m ($1.6m) per year (0.5-1% of Richter's net profit).
Nevertheless, Richter will probably focus on research and development first, so the profit contribution will likely be relatively weak initially. We do not expect generous reaction in the price of the stock due to the deal's relatively small size.
I predict that global markets, in general, will remain quite volatile for the rest of the summer. Investors seem uncomfortable making any bets as there are simply too many uncertainties, and no clear signals, to the future course of the equity market.