Central And Eastern European Big-Caps

After the fall of the Iron Curtain and especially following the accession into the European Union, the economies of Eastern Europe went through a painful, yet fruitful transformation into modern market economies. The region has flourished until the recent recession, with many of the regional corporations growing rapidly, charged by invigorated economies and the expansion into new regional and trans-European markets. As a result, some of the region’s companies have become powerful multinational businesses with billions of Euros in sales and bright prospects for continued growth in the future. In fact, this economic renaissance has been especially beneficial to Poland, Czech Republic, and Hungary. Companies from these three countries together have a 65% share in the list of the region’s largest 500 listed companies by revenues. Each of these countries has a representative in the top three. This article looks into performance of the three largest companies in Eastern Europe, giving insights into their future prospects for growth.

PKN Orlen (Poland) [www.orlen.pl] is the region’s largest publically traded oil production/refining and petrochemical company. It has production facilities in Poland, Czech Republic, Germany, and the Baltic States (Lithuania). In 2009, it was ranked in the Fortune Global 500 as the world’s 31st largest oil company and the world’s 249th largest company. Orlen made 79.5 billion Polish Zloty (€22.6 billion) in revenues in 2008, which was a 25% increase in sales from the year earlier. Revenues are expected to dip in 2009; however, the rising output and prices will support its rebound. The company made 655 million PLN (€186.1 million) in net income in 2007, which was 24% up from the year earlier. However, even though PKN Orlen operated at a loss in 2008, due to one-off charges and currency-related losses, the company’s future prospects remain optimistic. PKN Orlen employs some 23,000 employees.

As regards the company’s stock position, Orlen is currently trading at 30.31 Polish Zloty (€7.22). The company’s market capitalization is 13 billion PLN (€3.1 billion). The stock is trading at a very low price-to-book ratio of 0.65, compared to the industry median of 1.75. Its price-to-cash flow ratio is only 0.03, relative to 6.55 for the industry as a whole.

In addition to the local stock exchange, the Orlen shares are trading at the London Stock Exchange. The rebound in oil prices and industrial output worldwide, stimulated by the budding economic recovery, will support the positive short-term outlook for this company’s share price. In the long-run, rising energy prices will bode well for this company and all investors who make investments in this company.

MOL Group (Hungary) [www.mol.hu] is the second largest company in Central and Eastern Europe. It is Central Europe’s leading independent integrated oil and gas group with interests in exploration, production, refining, marketing and petrochemicals. The company had 2.9 trillion HUF (€11.8 billion) in assets as at 31 Dec 2008. The company employs over 15.000 people. In 2008, MOL made 3.5 trillion HUF (€14.3 billion) in sales and 141.4 billion HUF (€577 million) in net income.

MOL’s shares are listed at the Budapest, Luxembourg, and Warsaw Stock Exchanges, and its GDR’s are traded on London’s International Order Book and on OTC Bulletin Board in the United States. The company’s shares are currently trading at 16,000 Forint (€59.89), with a P-E ratio of 11.5. This makes the company relatively inexpensive and attractive to investors. In fact, Credit Suisse has just upgraded the stock from neutral to outperform, with the assumption that the company is trading at a 40% discount relative to its peers. It is also relevant to note that MOL paid a dividend of 883.36 HUF per share (€3.6 per share). Dividend payouts have been increasing at spectacular rates, by 16-fold between 2000 and 2008.

The coming economic recovery will boost industrial production and demand for oil derivatives. MOL stands to benefit from this. However, it is likely that the company’s expansion within the region and in Southeast Europe will drive the company’s growth in the future. Still, it should be noted that MOL’s expansion will be challenged by the expansion of the Russian oil and gas giants in the region. However, according to Credit Suisse, MOL “looks set to be a significant beneficiary of the completion of the Nabucco gas pipeline from Turkey to Austria and could benefit from Gazprom’s desire to secure greater access to customers in Europe.”

Skoda Auto (Czech Republic) [www.skoda-auto.com] is the third largest listed company in Central and Eastern Europe. The company is the part of VW Group and it is not listed on the exchanges.  Skoda Auto Group made 200.2 billion CZK (€7.75 billion) in sales in 2008, which is about 10% lower than in the year earlier. The company also realized 10.8 billion CZK (€417 million) in revenues, representing a decline of nearly a third from the figure recorded in 2007. Given that Skoda realizes over 67% of its sales in the EU consumer market, the global economic crisis, especially the weak consumer spending, caused the noted drop in revenues and income in 2008. The company had 122.5 billion CZK (€4.73 billion) in assets at the end of 2008, which was an increase of 5.9% compared to the previous year. Currently, the company employs some 26,700 employees.

As regards the company’s future prospects, Skoda Auto is part of the VW Group and its sales are tied to the automotive market developments in the European Union and the world as a whole. Faced with the difficult market conditions, which have seen a collapse of some car giants – notably the American manufacturers – auto industry continues to face tough environment. Consumer spending has been weak and will, most likely, continue to be lackluster. While the emerging economic recovery will improve the market conditions somewhat, it is unlikely that vehicle sales will stage a major comeback. This is so because employment outlook remains poor, and therefore, consumer spending prospects, especially as regards major consumer items such as cars, remain feeble at best.