The past six months brought another rally for the companies traded on the Bulgarian Stock Exchange (BSE), continuing the general bullish trend from 2006. Contrary to the investment community expectations from the beginning of the year that the market would slow to a moderate growth level, the market has continued to grow, with negligible corrections. Over the past six months the broad BG40 index, the blue-chip Sofix index of the 16 most liquid shares and the Dnevnik 20 index have risen by 66 per cent, 21.6 per cent and 36.4 per cent, respectively, although the preliminary expectations were for an annual increase of 35 per cent.
Almost any stock on the Bulgarian capital market is a winner, and the yield is considerably more than the average in the developed markets.
Half of the 40 most liquid companies have increased their market prices by more than 30 per cent over the past 6 months, 8 have gained between 10 and 20 per cent, and only 4 of them have generated losses of no more than -10 per cent. Obviously, market confidence has spread, since even companies which have not shown particularly high earnings growth potential have also added substantially to their market capitalisation. On the other hand, blue-chip companies in growing industries, enjoying stable or increasing market positions, favorable financial results, as well as transparent and determined management, have brought enormous gains to their shareholders.
What is causing the constant upward trend?
The simple answer to the sustained growth of the Bulgarian stock market is a large demand and restricted supply of liquid stocks.
The amount of free cash local institutional and private investors have for equity investments is constantly growing.
The revocation of the investment restrictions on the local pension funds has caused a large capital inflow into the most liquid Bulgarian stocks, and the equity investment portion of the funds’ portfolios has climbed from seven per cent to 26 per cent within a year. Only seven to eight per cent of the funds’ assets are invested in the other capital markets in the region, as the analytical resources are still most familiar with the Bulgarian stock market.
Additionally, mutual funds’ assets in Bulgaria are growing and will continue to grow with a three-digit growth rate until they turn into a common form of household savings, as they are in the developed markets. Attracted by the abnormally high yields, private and institutional investors put more money in the Bulgarian collective investment trusts, which in turn boost the market by generating more demand for high-quality stocks. Naturally, the mutual funds have also started investing in the regional capital markets like Serbia, Croatia, Romania, Russia, etc, as well as in structured products exposing them to other markets, but this trend is still small at the moment.
Foreign players are attracted by the high returns and the conditions that facilitate investment.
Foreign investors have largely contributed to the constant upward trend, as they realise more than 50 per cent of the total market turnover. Besides the speculative opportunities, which are typical for emerging markets, the strong fundamental indicators of the Bulgarian economy are attracting foreign capital. A GDP growth of 6.2 per cent, an impressive growth rate in the net results and revenues of the best publicly-traded companies, the improving liquidity, the support of EU funds, and the convergence of Bulgarian legislature to EU directives governing capital markets are among the main drivers of foreign interest in the Bulgarian market. Furthermore, the current account deficit has led the Bulgarian government to actively attract foreign investment in the real economy and the capital market. No capital gains tax, 10 per cent corporate income tax, as well as the potential 10 per cent social security tax simultaneously support real business as well as equity investments, which reflect real business development. The International Accounting Standards, practiced in Bulgaria, together with the fixed euro-leva exchange rate further encourage foreign investors interested in the Bulgarian capital market.
Some of the market winners for the last six months are:
Sinergon Holding, which saw a rise of 49.34 per cent has one of the most ambitious managements among the most liquid companies. The most important subsidiary, Toplivo, operates in the promising and profitable segment of fuel and construction materials distribution. The holding accumulated funds from the investment public several times, which will support future development.
Monbat, increased by 85.19 per cent. The starter battery producer worked at full capacity and has proved its quality in the EU market.
Increases in the price of lead were successfully transferred to consumer prices. Open to minor shareholders, the management has constantly worked toward increasing production capacity, efficiency and product development. Since becoming a public traded company, Monbat has doubled net income over all reporting periods.
Industrial Holding Bulgaria attracted investor interest because of the industries its subsidiaries operate in: machine building and engineering, ship building and ship repair. In 2007 the holding strengthened its position in the ship building industry, which is currently growing on a world wide basis, and the consolidated financial statements for the first three months of the year saw a 33 per cent increase in net income. Over the past six months the stock price has increased by 97.19 per cent.
Industrial Capital Holding added an impressive 105 per cent to its market capitalisation, after a four-fold increase in its capital through a retained income transfer and the market appreciation of some of its associated companies like M+C Hydraulic and Emka.
Euroins, saw a rise of 106.66 per cent. The insurer tripled net income in 2006, despite operating in a particularly competitive industry.
The company continued this positive performance in 2007 and has broadened its market position through the acquisition of a Romanian insurer and entry into 8 EU member countries. Euroins won the “best corporate management” prize in 2007, thanks to its accurate financial statements forecasts and straightforward reporting of future development to the market.
Orgachim, the traditional investors’ favourite, added a record 218 per cent to its market capitalisation over the past six months. The repayment of the ZUNK obligation, increasing net income by six times for the first half of 2007, constant innovation and broadening market share were some of major reasons for the impressive stock price increase.
Stara Planina Hold added 230 per cent to its market value over the past six months. During 2006, the company remained unnoticed, although the value of its subsidiaries significantly exceeded the market capitalisation of the holding. Two of its most promising subsidiaries, M+C Hydraulic and HES increased their capital to sustain new projects, and the transparency and improved liquidity of the holding attracted additional investor interest.
The other favourites for the last six months are:
Lead and Zinc Komplex, with an increase of 71 per cent driven by the launch a project for a new production facility and doubling net income for the first half of 2007.
Bulgarian American Credit Bank, with a rise of 51 per cent through a sustained constantly growing income and the best return on capital and assets among all local banks.
Emka, with an increase of 69 per cent. The company reported a significant improvement in its net income for 2006 and the first three months of 2007, although metals prices doubled. Investor interest was stimulated through an increase in capital through retained income, together with an ambitious investment program.
Еlana Agricultural Land Opportunity Fund, with a rise of 57 per cent turned out to be one of the most profitable real estate investment trusts (REITs). The first fund investing in agricultural lands in Bulgaria managed to successfully increase its capital several times, and is has already reached a phase where income is generated not only by asset revaluation, but also through real operating activities.
