bre bank securities 5 july 2007 periodic report equity...

BRE Bank Securities

5 July 2007

Monthly Report BRE Bank Securities BRE Bank Securities

Periodic Report

Monthly Report July 2007

Equity market Tekst Company News Banks. Tekst Gas & Oil. Tekst Telecommunications. Tekst Media. Tekst IT. Tekst Metals. Tekst Construction. Tekst Pharmaceuticals. Tekst Retail\Wholesale. Tekst Others. Tekst

BRE Bank Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

16 July 2007

WIG vs. indices in the region

BRE Bank Securities

Equity Market

Macroeconomics

Avg daily trading volume

Average P/E 2008

Average P/E 2007

WIG X X

X

PLN X m

BRE Bank Securities

Periodic Report

Monthly Report July 2007

Equity market We expect equities to run out of breath in late August/early September, preceded by new record highs in indexes (driven by foreign markets). We still prefer WIG20 stocks over midcaps. In large caps, we advise to overweight commodity stocks (PKN, KGHM) as they gain on soaring commodity prices, and underweight banks. Banks. The WSE’s bank stock index WIG-Banki rose 1% since our last Monthly Report compared to a 3.6% gain in the WIG index and a 2.4% gain in the WIG20. We were right in advising investors to take profits on bank shares. June’s biggest losers were BZ WBK (6.5%), Bank Handlowy (5.4%), BPH (3.5%). July will be marked by FQ2 earnings previews. We anticipate that banks will show equally strong growth as in the first quarter, as indicated by the bank industry’s robust debt and asset growth. This rosy outlook is for the most part already priced in bank stocks. Gas&Oil. With the US’s supply cushion worn thin to the point of non-existence, as demand reaches its seasonal peak, another bout of gasoline price hikes is to be expected in July/August. Energy stocks will be further supported by an increase in crude oil prices spurred by hurricane fears in the Gulf of Mexico. Telecoms. After a suspected leak of TPSA’s new strategic objectives, we expect the management to just-reiterate their old targets, and announce the new strategy a few months later. We advise investors to reduce positions on the ongoing buy-back. Media. The media sector's weak performance is a result of slower ad revenue growth. We recommend to overweight Agora and underweight TVN at the current price level. IT. IT firms are still feeling the shortage of orders from the government. We maintain that a revival in government spending cannot be expected until after the summer holidays. Construction. Construction production slowed down to 16.3% y/y in May (YTD growth stood at 40% relative to a year earlier), somewhat dampening investor sentiment to building stocks. The sentiment will remain subdued until the second-quarter earnings season which promises to be good. We have an ACCUMULATE rating on Polimex. Retail. As the FMCG industry continues to consolidate, we expect a series of acquisition news, especially from Emperia which is preparing for an SPO after the summer holidays. Even so, neither Emperia nor Eurocash are our favorite investment picks at the current price levels. Ratings. We are upgrading our ratings on Agora (Accumulate), BZ WBK (Hold), Erbud (Accumulate), Bank Handlowy (Reduce), and downgrading TP SA (Reduce) and ZA Puławy (Hold) as of the date of this release. Our rating on Kredyt Bank is under revision. Provimi-Rolimpex is suspended.

BRE Bank Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

Analysts:

Marta Jeżewska (+48 22) 697 47 37 marta.jeż[email protected]

Michał Marczak (+48 22) 697 47 38 [email protected]

Krzysztof Radojewski (+48 22) 697 47 01 [email protected]

Kamil Kliszcz (+48 22) 697 47 06 [email protected] Piotr Janik (+48 22) 697 47 40 [email protected]

Macroeconomic Analyst Janusz Jankowiak

5 July 2007

WIG vs. indices in the region

BRE Bank Securities

Equity Market Macroeconomics

Avg daily trading volume

Average 2008 P/E

Average 2007P/E

WIG 66 952 20.6

17.9

PLN 2 010m

30000

35000

40000

45000

50000

55000

60000

65000

06-06-21 06-10-17 07-02-12 07-06-10

pkt

WIG BUX PX

BRE Bank Securities

5 July 2007

Monthly Report BRE Bank Securities

Table of Contents 1. Equity market ........................................................................................ 3 2. Current ratings by BRE Bank Securities S.A. ........................................ 5 3. Ratings statistics ................................................................................... 6 4. Macroeconomics ................................................................................... 7 5. Fund Flows ............................................................................................ 8 6. Financial Sector ..................................................................................... 10

6.1. BPH ............................................................................................ 12 6.2. BZ WBK ...................................................................................... 13 6.3. Handlowy .................................................................................... 14 6.4. ING BSK ..................................................................................... 15 6.5. Kredyt Bank ................................................................................ 16 6.6. Millennium .................................................................................. 17 6.7. Pekao SA ................................................................................... 18 6.8. PKO BP ...................................................................................... 19

7. Gas & Oil, Chemicals .............................................................................. 23 7.1. Lotos ........................................................................................... 24 7.2. PGNiG ........................................................................................ 25 7.3. PKN Orlen .................................................................................. 26 7.4. ZA Puławy .................................................................................. 28

8. Telecommunications .............................................................................. 29 8.1. Netia ........................................................................................... 30 8.2. TP SA ......................................................................................... 31 9. Media ..................................................................................................... 33 9.1. Agora .......................................................................................... 34 10. IT Sector ................................................................................................ 35 10.1. ABG Ster-Projekt ...................................................................... 37 10.2. Asseco Poland .......................................................................... 38 10.3. ComArch ................................................................................... 39 10.4. Macrologic ................................................................................ 40 10.5. Prokom Software ...................................................................... 41 10.6. Sygnity ...................................................................................... 42 10.7. Techmex ................................................................................... 43 11. Metals .................................................................................................... 44 11.1. Kęty ........................................................................................... 44 11.2. KGHM ........................................................................................ 45 11.3. Koelner ...................................................................................... 46 12. Construction .......................................................................................... 47 12.1. Budimex ..................................................................................... 50 12.2. Elektrobudowa ........................................................................... 51 12.3. Erbu ........................................................................................... 51 12.4. Hydrobudowa Śląsk ................................................................... 52 12.5. Polimex Mostostal ...................................................................... 53 12.6. Rafako ....................................................................................... 54 12.7. Ulma Construccion Polska ......................................................... 54 13. Pharmaceutical Manufacturers and Distributors .................................... 55 13.1. Farmacol .................................................................................... 55 13.2. PGF ........................................................................................... 55 13.3. Prosper ...................................................................................... 56 13.4. Torfarm ...................................................................................... 56 14. Retail\Wholesale .................................................................................... 57 14.1. Eldorado .................................................................................... 58 14.2. Eurocash ................................................................................... 59 15. Others .................................................................................................... 60 15.1. Kogeneracja .............................................................................. 60 15.2. Mondi ......................................................................................... 61

BRE Bank Securities

5 July 2007


Equity market June was marked by considerable stock volatility, both locally and globally, spurred mainly by increasing debt yields. Investors were rattled by concerns that, if US 10Y notes hit the 5.3% yield mark, or the German Bunds spiked to 4.7%, capital would switch from equity to debt. Fears of an increase in inflation and further rate hikes in the US and EU are exaggerated in our view (base inflation in both markets is in a downtrend, and stays in line with central bank targets). The probability of monetary loosening in the US decreased after a positive leading indicators report, but it is still higher than the probability of tightening. This guess is based on the assumption that, after rising to 3% in Q2, the US GDP will pull back down to 1.8% in the second half of the year on continued weakness in the construction industry, which should finally result in job cuts that will, in turn, reduce consumption. We will see similar trends in the EU where interest rate hikes (the two upcoming hikes are priced in) are in store to produce a cooling effect on the economy (2007 GDP growth projected at 2.7%, down to 2.0% in 2008). In some EU countries, the interest rate-sensitive construction industry already has an 18% share in the GDP. A slower GDP, and hence also company earnings, might spur a stronger correction in equity markets after the summer holidays, with the emergence of data confirming these predictions. However, such a downturn will not eliminate global excess liquidity, i.e. the availability of cheap money keeping the long uptrend in place. A market decline and the accompanying uncertainty will bring stock prices down to levels that investors should consider attractive. Simultaneously, bond yields will slide on expectations of interest rate cuts to 4.7% in the US (from 5.09%), and to 4.4% (from 4.57%) in the euro zone. The dollar’s expected further weakening should drive commodity prices and emerging markets. In the near term, foreign investors might turn their attention to the yen which is underpriced according to many analysts. A rapid appreciation could affect stock markets. In this environment, the Polish equity market is also in for a longer correction, additionally underpinned by IPOs. Note that the market is already very selective at this point. In line with our sector calls, small and mid-sized banks underwent a correction in June, while energy stocks and TPSA rallied. We expect these trends to continue through August, and see equities run out of breath in late August/early September, preceded by new record highs in indexes (driven by foreign markets). We still prefer WIG20 stocks over midcaps as cheaper and less prone to a downturn in case of a correction. Among large caps, our best bets are commodity stocks like PKN, KGHM which are gaining on soaring commodity prices, and our least favorite picks are banks (ING BSK, Handlowy, Millenium, BZ WBK), which will be the first to feel the impact of any monetary tightening. TPSA is no longer an attractive investment at the current price level. Real-estate developers are still under supply pressure. Polish stocks remain bullish amidst favorite market settings, despite looming macro trouble. But we should point out that the recent rallies are not as strong as observed in most emerging markets, also in our part of the world, which is most likely a sign of weakness. We see several reasons for this:

• large equity holdings by open pension funds (OFEs, ca. 39%) which have come close to the equity component cap (40%), and which will therefore generate lower demand for stocks going forward,

• increasing investments by investment fund companies (TFs) in foreign markets (though still relatively small),

• valuations relative to other emerging markets discourage foreign investors (commodity stocks are an exception),

• upcoming supply of shares from IPOs in the fall (ca. PLN 10bn). All these factors would be of no importance if the economy’s outlook were more rosy. But there is a real risk of a supply barrier obstructing growth. An inefficient labor market, paired with upward salary pressure and huge internal demand (which grows 3% over GDP), might cause the economy to overheat and spark a much harsher reaction from the Monetary Policy Council than the market is expecting. The budget provides for one more interest rate hike this year and two next year (the repo rate pegged at 5% in 2008). This scenario is priced in at this point, but the August/September inflation and productivity data could shift these expectations by another 50-100 bps. Such hikes would have a real impact on the economy (GDP slowdown in 2H2008 and 2009). We are most concerned about the bank sector where valuations already factor in the expected robust growth in lending at lower interest rates. From the standpoint of foreign investors, the zloty should appreciate further in the near term, supported by the interest rate situation. Against what is expected of the ECB, the hikes foreseen in the budget denote a strengthening of the zloty. But if foreign capital deems the Council’s reaction too late, and given that future economic growth is threatened by necessary remedial measures (monetary tightening), we will see a rapid outflow of capital. Concerns over a depreciation in the zloty imply a sellout on the Warsaw Stock Exchange.

BRE Bank Securities

5 July 2007


Like we already said last month, we see this as “Scenario B”, but it will very likely play out toward the end of the summer. We will not know if these are valid concerns, or just another opportunity to buy share, until we see the Q4 data.

BRE Bank Securities

5 July 2007


Current ratings by BRE Bank Securities

Security Rating Target Price Date Issued

ABG STER-PROJEKT Hold 7.87 2007-01-08 AGORA Accumulate 47.60 2007-07-05 ASSECO POLAND under revision 2007-05-11 BPH Accumulate 1079.00 2007-05-31 BUDIMEX Hold 121.70 2007-05-29 BZWBK Hold 284.10 2007-07-05 COMARCH Reduce 185.80 2007-02-05 ELEKTROBUDOWA Hold 221.50 2007-05-29 EMPERIA HOLDING Reduce 134.17 2007-05-21 ERBUD Accumulate 100.00 2007-07-05 EUROCASH Sell 7.38 2007-02-05 FARMACOL Accumulate 62.90 2007-06-25 HANDLOWY Reduce 109.00 2007-07-05 HYDROBUDOWA ŚLĄSK Hold 209.00 2007-05-29 ING BSK Reduce 953.50 2007-06-06 KĘTY Reduce 180.50 2007-06-06 KGHM Accumulate 119.00 2007-07-03 KOELNER Sell 53.72 2007-05-09 KOGENERACJA under revision 2007-06-06 KREDYT BANK under revision 2007-07-05 LOTOS Hold 45.80 2007-05-09 MACROLOGIC Buy 58.43 2007-02-13 MILLENNIUM Sell 10.54 2007-06-06 MONDI Reduce 80.00 2006-12-05 NETIA Sell 3.80 2006-09-06 PEKAO Hold 269.00 2007-06-06 PGF Reduce 98.40 2007-06-25 PGNiG Suspended 2007-02-05 PKN ORLEN Accumulate 61.00 2007-07-02 PKO BP Hold 54.44 2007-05-31 POLIMEX MOSTOSTAL Accumulate 297.70 2007-05-29 PROKOM SOFTWARE Hold 150.30 2007-02-05 PROSPER Hold 27.00 2007-06-25 PROVIMI-ROLIMPEX Suspended 2007-07-05 RAFAKO Reduce 11.40 2007-05-29 SYGNITY under revision 2007-06-06 TECHMEX under revision 2007-03-07 TELEKOMUNIKACJA POLSKA Reduce 20.20 2007-07-05 TORFARM Hold 95.3 2007-06-25 ULMA CONSTRUCCION POLSKA Hold 306.6 2007-05-29 ZA PUŁAWY Hold 127.98 2007-07-05

BRE Bank Securities

5 July 2007


Ratings issued in the past month

Ratings Statistics

All Clients of BRE Bank Securities

Statistics Sell Reduce Hold Accumulate Buy Sell Reduce Hold Accumulate Buy

count 4 9 13 6 1 1 2 6 2 0 % of total 12.1% 27.3% 39.4% 18.2% 3.0% 9.1% 18.2% 54.5% 18.2% 0.0%

Ratings changed as of July 5th

Security Rating Previous Target Price Date Issued

AGORA Hold Accumulate 47.60 2007-06-06

BZWBK Reduce Hold 284.10 2007-06-06

FARMACOL Accumulate under revision 62.90 2007-06-25

HANDLOWY Sell Accumulate 109.00 2007-06-06

ING BSK Reduce Hold 953.50 2007-06-06

KĘTY Reduce Hold 180.50 2007-06-06

KGHM Accumulate Hold 119.00 2007-07-03

KOGENERACJA under revision Buy 2007-06-06

KREDYT BANK Hold Accumulate 23.51 2007-06-06

MILLENNIUM Sell Hold 10.54 2007-06-06

PEKAO Hold Accumulate 269.00 2007-06-06

PGF Reduce under revision 98.40 2007-06-25

PKN ORLEN Accumulate Buy 61.00 2007-07-02

PROSPER Hold under revision 27.00 2007-06-25

TORFARM Hold under revision 95.30 2007-06-25

Security Rating Previous Target Price Date Issued

TP SA Reduce Hold 20.20 2007-07-05

ZA PUŁAWY Hold Buy 127.98 2007-07-05

HANDLOWY Reduce Sell 109.00 2007-07-05

KREDYT BANK Under revision Hold - 2007-07-05

BZ WBK Hold Reduce 284.10 2007-07-05

ERBUD Accumulate Hold 100.00 2007-07-05

AGORA Accumulate Hold 47.60 2007-07-05

PROVIMI-ROLIMPEX Zawieszona Hold - 2007-07-05

BRE Bank Securities

5 July 2007


Slower economic growth, paired with increasing salaries and inflation, indicates that the Polish economy is bumping against significant supply obstacles. Meanwhile, next year’s budget plans suggest that the Polish government wants to continue its policy of supporting demand with a fiscal impulse, leading to a deepening macroeconomic imbalance. We expect a harsh reaction from the Central Bank, manifested in policy tightening. The sub-optimal policy mix will slow economic growth dramatically in 2009. Any measure to stimulate demand, especially amidst a robust autonomous demand (unless designed to rapidly throw the fundamentals off balance), must be countered with appropriate supply measures. It seems reasonable that, if the govern-ment wants to influence aggregate demand through fiscal policy, then, to prevent prices from increasing, it also has to create an environment that will foster supply. Unfortunately, recent pro-supply measures do not look promising. 2005-2008 core macroeonomic indicators, delivery and forecasts

Source: GUS, Ministry of Finance The key macroeconomic indicators look good. But the Polish Business Roundtable (PRB) of-fered more cautious forecasts as regards economic growth (5.3%), inflation (average annual CPI 2.7%), and the C/A deficit (C/A -4.8%.GDP). Contrary to bleak predictions, the zloty held strong in June. It was confirmed that any weak-ness on our currency attracts euro-selling exporters to the market, protecting the zloty against a sharp downturn. Interest rate hike expectations are also not without importance. The market is just starting to appreciate the scale of this and next year’s hikes (5% and 6% respectively, repo rate at period-ends). Given the expected weakening of the dollar against the euro, it is reasonable to anticipate that the zloty will appreciate against the dollar in the third quarter (2.75). At the same time, it will stay below 3.90 against the euro. If expectations of a rate hike to 5% by the Monetary Policy Council by the end of the year are maintained, and the ECB stops tightening at 4.00% until fall, the zloty/euro exchange rate might temporarily fall as low as 3.70. The debt market responded with a sharp rise in yields to the steepening in the base market curve and increasing inflation expectations in Poland. Volatility increased markedly over the past few weeks. The reason besides global factors was the distribution of votes within the Monetary Policy Council (a steady 6:4 in favor of tightening) determining possible interest rate hike decisions. The monetary policy is obviously data dependent, although most investors are inclined to think that the Council is already behind the curve and will have to apply more dras-tic measures to bring inflation back on track. Hence, even if one Council member changes sides, market expectations will change. Any suggestion of a change of heart within the Council in favor of tightening might raise the curve even steeper. And if the market becomes convinced that the cycle will significantly exceed the current expectations (50bps this year), the correction will be deep. This would definitely have happened in case of a hike in June, as the 5.80% mark on 10Y bonds would have been far exceeded.

Indicator 2005 2006 2007P 2008F GDP % 103.6 106.1 106.5 105.7 Exports % 108.0 114.5 111.0 109.0 imports % 104.7 115.8 115.5 111.2 Local demand % 102.4 106.6 108.5 106.8 Consumption % 102.7 104.9 105.3 104.7 -private % 102.0 105.2 106.4 105.8 -public % 105.0 103.7 101.5 101.0 accumulation % 101.4 114.1 119.4 113.4 -gross fixed-asset expenditure % 106.5 116.5 118.0 114.0 CPI (avg./year) % 102.1 101.0 102.0 102.3 PPI (avg./year) % 100.7 102.3 102.3 102.3 Avg. gross salary PLN 2 360.6 2 477.2 2 656.0 2 815.0 Avg. employment thousands 8 786.4 8 982.0 9 242.0 9 453.0 Unemployment rate (end-of-year) % 17.6 14.9 11.3 9.9 PLN/USD (avg.) PLN 3.23 3.1 2.84 2.77 PLN/EUR (avg.) PLN 4.03 3.9 3.81 3.74 USD/EUR (avg.) USD 1.24 1.26 1.34 1.35 C/A to GDP % -1.7 -2.3 -3.9 -4.7

Macroeconomics

BRE Bank Securities

5 July 2007


TFI After record inflows in March (+PLN 4.7bn), April was marked by a temporary slowdown, with TFIs reporting inflows of PLN 2.8bn, mostly to equity funds (+PLN 1.3bn) which were preferred over growth funds (a PLN 0.12bn outflow), bonds (PLN 0.22bn), and money market funds (-PLN 0.15bn). Similar as in March, investors placed the bulk of their capital in other funds (+PLN 1.02bn). The bullish Warsaw market drove TFI inflows in May, when funds received PLN 4.5bn, including PLN 3.5bn inflows to equity funds alone – a new record. The trend away from bond funds (-PLN 0.34bn) and money market funds (-PLN 0.4bn) toward increasingly profitable equity portfolios continued in May. Poles are likely to tap into their savings in the summer, but, if the trends currently observed in capital markets continue, funds are sure to see more inflows.

Fund Flows

TFI inflows/outflows by “equity component” funds and money market/debt funds

Source: Analizy Online

OFE Pension fund (OFE) assets saw a 3.38% increase in June compared to May, with the equity portfolio gaining 2.25%. As a result, the equity component decreased from 38.7% to 38.3% month on month - its first dip since December 2006. With indexes on an upward curve, this means that funds were selling shares. As a reminder, the WIG index rose 4%, and the WIG20 index gained 3% in the same period. The shift in trends observed in the past few months, when the equity component went hand in hand with indexes, might be a sign of the OFEs’ cautious bets to not exceed the 40% cap on allowed equity holdings.

Equities in OFE portfolios vs. WIG

Source: BRE Bank Securities, Bankier.pl

-2 000

-1 000

0

1 000

2 000

3 000

4 000

5 000

Apr-06 Jul-06 Oct-06 Jan-07 Apr-07

PLN m

Equity, grow th, balanced Debt, money market, other funds

16 000

26 000

36 000

46 000

56 000

66 000

76 000

May-05 Nov-05 May-06 Nov-06 May-07

25%

27%

29%

31%

33%

35%

37%

39%

WIG Equity component of OFE portfolios

BRE Bank Securities

5 July 2007


Emerging market funds Between May 30th and June 27th, EM funds received $3.1bn in inflows (+0.27%). The biggest gainers were Latin America (+$2.5bn; +8.07%) and global funds (+$2.3bn; +0.31%). EMEA funds recorded total outflows of $0.2bn (-0.49%), but this should not raise concerns about local index volatility in the future. Asian market funds were the biggest losers with a whopping $1.4bn combined outflow (-0.98%), but the situation seems to have steadied in the past few weeks. Overall, despite negative flows in May and June, the last two weeks of June witnessed a rebound (+$0.6bn; +0.004%), possibly showing that sentiment has eased for the time being.

Weekly inflows/outflows for selected emerging market funds

Source: EmergingPortfolio.com

GEM

-3 000-2 500-2 000-1 500-1 000

-5000

5001 0001 500

4-01

4-03

4-05

4-07

4-09

4-11

4-01

4-03

4-05

mln USD EMEA

-2 000

-1 500

-1 000

-500

0

500

1 000

4-01

4-03

4-05 4-07

4-09

4-11

4-014-0

34-0

5

mln USD$ millions $ millions

BRE Bank Securities

5 July 2007


Financial Sector Pengab down for second month in a row The banking industry’s sentiment indicator fell 2.4pts to 38pts in June. For the first time in months, the indicator was lower than in the corresponding period a year earlier (in June 2006, it stood 1.2pts over the current level). If it goes any further down, we will be able to speak about a trend reversal. The Pengab is a product of surveys conducted on 200 bank outlets. Last month, branch managers predicted that Poles will shift away from deposits and toward financial instru-ments. In loans, demand for zloty financing and home loans is expected to decline, while de-mand for corporate loans will probably pick up. We are reiterating our outlook on the sector. We believe that banks are fully capable of fulfilling our long-term forecasts. As for the Pengab slip-page, no one can expect the industry to stay super-optimistic for too long. We think that, as last year's comparable base increases, branch managers worry about their capacity to continue to show strong growth. Loan demand is threatened by expectations of interest rate hikes. We as-sume that volumes will continue to rise, though at a slower pace.

Banks netted PLN 3.6bn for FQ1’07, chalking up 22.3% Y/Y increase The GUS reported that net income generated by banks in FQ1 chalked up a 22.3% y/y increase to PLN 3.6bn. Household loans surged 38.7%, and corporate loans rose 17.5%. The survey included 64 commercial banks and 583 co-op banks. These numbers are in line with preliminary statistics released earlier by the GINB, showing an aggregate net income generated by the bank sector at PLN 3.64bn after a 22% increase. The market has already discounted the strong earnings expected for FY2007. We predict that the banks in our coverage universe will report an 18% y/y increase in their FY2007 bottom line income. UOKiK’s intercharge battle Almost six month after the competition watchdog UOKiK ruled on the intercharge fee issue and accused leading Polish banks of fixing prices, nothing has been done as a way of punishment. The fines imposed on 20 banks (PLN 164m in total) were enforceable immediately, but the banks appealed and nothing more has been heard in the matter since then. Now, the UOKiK decided to go to court. The case files are around 25 thousand pages, so, this is shaping up to be a long process. As long as the UOKiK stops at cash fines, bank earnings will not suffer. Most of the listed banks fined (except for Bank Handlowy) recognized appropriate allowances back in Q4’06. We think that banks will scale intercharge fees back in the future as card payment vol-umes increase. What could hurt bank income would be if the court ordered a rapid and deep cut in the fees. Another risk is that retailers will claim back the fees unlawfully charged in the past. As things stand, however, we think that the probability of the worst-case scenario is very low. Kwaśniak to advise NBP President, Janc appointed GINB head Wojciech Kwaśniak, who recently resigned from his position as head of the General Inspector-ate for Banking Supervision (GINB), accepted a job as advisor to Sławomir Skrzypek in matters concerning Poland's financial security network. He was replaced by Alfred Janc, Professor with the Poznań University of Economics. The change poses a risk of delays in the Pekao/BPH merger schedule and sale of the “Mini-BPH” spun off from BPH. Bank supervision has not given clearance to the merger yet, and the new Head of GINB will probably need some time to ac-quaint himself with the documentation.

Pengab; left-hand chart: 01.06 – 06.07; right-hand chart: 01.1993 – 06.07

0

10

20

30

40

50

60

Jan-93 Sep-94 May -96 Jan-98 Sep-99 May -01 J an-03 Sep-04 May -06

28.8

28.1 28

.7

33.6 34

.5 35.8

34.5

3436

.2 36.8

42

39

35.8

3335

.1

40.9

37.4 39

.2 40.9

39.9

43.4

43.6

40.3

39.5

38 38.3 40

.744

.1

40.5

38.1

20

25

30

35

40

45

50

Jan-

05

Mar-

05

May-

05

Jul-

05

Sep-

05

Nov-

05

Jan-

06

Mar-

06

May-

06

Jul-

06

Sep-

06

Nov-

06

Jan-

07

Mar-

07

May-

07

Source: BRE Bank Securities, Polish Bank Association

BRE Bank Securities

5 July 2007


Mortgage loans still on upward curve PLN 11bn-worth of mortgage loans have been sold year to date. The average loan amount is on an upward trend, reaching PLN 180,000 in Q1 vs. PLN 150,000–160,000 a year earlier. At the beginning of the year, the Polish Bank’s Association (ZBP) forecasted that this year’s sales will amount to PLN 54bn, and has recently reiterated this forecast. We agree with the PLN 54bn target, and predict that mortgage loans sales will continue to increase relative to Q1. To meet the ZBP’s estimates, banks have to sell over PLN 15bn in home loans on average per quarter. BIK issued 40% more credit reports in May than a year earlier The credit information bureau (BIK) issued 1.29m credit reports to banks in May, 40% more than a year earlier. In the period from January to the end of May, the BIK issued 5.59m credit scores, 38% than in the corresponding period of 2006 (915,000 in January, 861,000 in Febru-ary, 1.37 million in March, and 1.14 million in April). Consumer demand for loans continues to be strong. SKOKs gearing up to conquer Russia and Romania The credit and savings union “SKOK" hopes to increase the number of members from 1.6 mil-lion now to 2 million next year. In the future, they hope to lure approximately 30% of Poles, among others by installing some 600 ATMs across the country and opening a clearing center. In terms of credit card issuances, the target for this year is ~0.8 million. All these undertakings will be financed through an upcoming IPO. SKOK also has ambitions to expand internationally, and move into Russia and Romania. SKOK is potentially a dangerous rival to banks that are targeting clients in small towns and rural areas. While its operating scale is relatively small for now, a goal to have 30% of Poles in its client base means that it is determined to expand its reach. Interest rate hikes will not boost profit margins According to Parkiet, a competitive market environment will not allow banks to widen their mar-gins in case of an interest rate hike. Bankers say that such hikes could end the borrowing boom. We agree that monetary policy tightening will not lead to margin expansion. On the lending side, interest rates will only rise on floating-rate facilities (mainly home and corporate loans). On the deposits side, the main beneficiaries of the hike will be banks with large current-account bases. All in all, monetary tightening is good for the bank sector to the extent that it does not affect the lending business. Expander seeks new investor GE wants to find a new investor for Expander, but without giving up its controlling stake in the financial intermediary. The investor’s role would be to develop the financial intermediary’s offer-ing. GE wants to complete the process by the end of the year, and hopes to start receiving of-fers in early July. GE’s advisor in the process is Rothschild Polska. We suspect that GE is accu-mulating cash to pay for BPH. Also, a new investor with decision-making powers will enable GE to focus on the incorporation of BPH into its organization after the takeover. Recent rumors that GE was planning to back out of the Mini-BPH acquisition have not been confirmed. However, the plans to entrust Expander to another investor probably prove that they were false. Dominet gains ground After the takeover by Belgium’s Fortis group, Dominet Bank’s organization will be streamlined to reinforce the business departments and the network expansion department. The bank’s new CEO Jacek Obłękowski revealed that the 2008-2012 growth strategy will be ready to present to the supervisory board in the middle of the year. This means that the changes will start after the summer. The strategy will be designed so as to ensure fast and visible growth while maintaining profitability and security of business. The bank has plans to increase the number of its own branches as well as franchise outlets. Dominet Bank’s entire sales network currently comprises 180 outlets, but this number will be multiplied several times in a few years’ time. The CEO also disclosed that the bank was working on new products, including a home financing facility set to be launched in late 2007 / early 2008. Dominet’s growth poses a competitive threat to listed banks. Considering that all banks have plans to increase market share, the battle is going to be fierce.

BRE Bank Securities

5 July 2007


Analyst: Marta Jeżewska19 Last Recommendation: 2007-05-31(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 2 175.5 2 238.9 2.9% 2 346.1 4.8% Number of shares (m) 28.7Interest margin 3.5% 3.5% 3.6% MC (current price) 28 228.1Revenue f/banking oper. 3 533.6 3 646.0 3.2% 3 873.0 6.2% Free float 25.3%Operating profit 1 853.8 2 171.2 17.1% 2 195.8 1.1%Gross profit 1 633.6 1 895.1 16.0% 1 898.6 0.2%Net prof it 1 267.8 1 493.7 17.8% 1 491.6 -0.1%

ROE 19.2% 21.1% 20.0% Price change: 1 month -1.4%P/E 22.3 18.9 18.9 Price change: 6 month 6.5%P/BV 4.1 3.9 3.7 Price change: 12 month 40.6%D/PS 30.0 36.2 42.7 42.6 Max (52 w eek) 1 088.0Dyield (%) 3.1 3.7 4.3 4.3 Min (52 w eek) 680.0

Current price: PLN 983 Target price: PLN 1079BPH (Accumulate)

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BPH WIG

Not much has changed over the past month in the way of obtaining clearance necessary to divide BPH, incorporate one part to Pekao, and sell the other part, the Mini-BPH. Bank supervision authorities are taking their time, and UniCredit and GE Money are still in talks. That said, we are not changing our outlook on BPH. Our valuation is a sum of two parts: the per-share price of Pekao multiplied by the exchange ratio (3.3 shares of Pekao for 1 share of BPH), and the selling price of the Mini-BPH. Our current per-share target on BPH (PLN 1079/share) is 82% the assets to be transferred to Pekao (the target on Pekao is PLN 269/share), and 18% the value of Mini-BPH’s assets (based on the assumption that GE Money will buy the Mini-BPH for just under PLN 5.5bn, i.e. ca. EUR 1.46bn). The selling price remains the big question: the market prices the Mini-BPH at EUR 1bn-EUR 1.5bn (PLN 3.75bn-PLN 5.64bn). If we assume that it sells for EUR 1bn (PLN 3.76bn, PLN 130 per one share of BPH), the per-share price of BPH would amount to PLN 1019/share. These are very conservative assumptions. We are reiterating an ACCUMULATE rating on BPH as an option to buy into Pekao at a lower price than its current market value. Support rating for BPH Fitch affirmed BPH’s support rating ('1') on Rating Watch Negative. The support rating was retained in light of the upcoming divestment by UniCredit. In April 2007, GE Money was granted an exclusive right to negotiate the acquisition of the Mini-BPH. But the spin-off has not yet been approved by bank supervision. Fitch believes that GE Money can provide sufficient support for BPH to receive a rating of ‘1’. But the negative outlook signals that, after the sale, the rating can be either downgraded or retained, but cannot be raised. Until UniCredit and GE Money reach an agreement, BPH’s support rating will remain on Rating Watch Negative. GE Money rumored to be backing out According to WSJ Polska, GE Money might back out of the negotiations to acquire the Mini-BPH due to a deadlock in the talks. Reportedly, the lack of spin-off clearance from banking supervision is not the only bone of contention. GE Money refuses to accept certain sale terms sought by UniCredit, including a two-year ban on the employees of the part of BPH to be taken over by Pekao from accepting employment with the part to be taken over by GE, and a two-year freeze preventing the new BPH from reaching out to clients of Pekao. Those are all unconfirmed rumors. Differing positions are inherent in all negotiations. The WSJ does not mention anything about the selling price, which, we would have thought to be the toughest issue. The market would respond negatively to GE Money’s withdrawal from the talks. Subsequent reactions would depend on UniCredito which could either continue its talks with another bidder, or hold a new tender. The longer this takes, the worse for the current BPH’s market value.

BRE Bank Securities

5 July 2007


Analyst: Marta Jeżewska44 Last Recommendation: 2007-07-05(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 1 034.2 1 228.6 18.8% 1 450.5 18.1% 1 663.8 14.7% Number of shares (m) 73.0Interest margin 3.3% 3.4% 3.5% 3.6% MC (current price) 21 348.2Revenue f/banking oper. 2 365.2 2 922.0 23.5% 3 390.7 16.0% 3 827.7 12.9% Free float 29.5%Operating profit 1 084.1 1 534.4 41.5% 1 852.1 20.7% 2 123.6 14.7%Gross profit 689.5 1 065.5 54.5% 1 515.4 42.2% 1 756.0 15.9%Net prof it 758.2 1 080.6 42.5% 1 233.2 14.1% 1 395.2 13.1%

ROE 20.7% 25.2% 25.0% 25.2% Price change: 1 month -5.6%P/E 28.2 19.8 17.3 15.3 Price change: 6 month 30.0%P/BV 5.4 4.6 4.1 3.7 Price change: 12 month 62.6%D/PS 6.0 6.0 8.9 10.1 Max (52 w eek) 315.3Dyield (%) 2.1 2.1 3.0 3.5 Min (52 w eek) 174.0

BZ WBK (Hold)Current price: PLN 292.6 Target price: PLN 284.1

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BZ WBK WIG

BZ WBK's stock fell 6.5% since our last rating, prompting us to upgrade from Reduce to HOLD. We expect strong second-quarter earnings figures from the bank. Broad exposure to corporate clients and equity market trading will be the driving force behind bank earnings, in addition to Retail. Income will receive an additional boost from dividends from CU (PLN 60.33m) which are 13.8% higher this year than last. The bank trades on a ‘07 P/E ratio of 19.8, i.e. below the sector average of 23, but we believe that its stock already prices in the good FY2007 earnings outlook. Our FY2007 net income estimate for BZ WBK is PLN 1081m (an expected 42.5% increase on FY2006). PLN 400m on branch expansion BZ WBK has earmarked PLN 400m for sales network expansion in the next four years, including setting up of 250 branches (in addition to the 380 already in operation), development of the agency network, and increasing the number of ATMs. The expansion will focus on areas where the bank has a weaker presence, mainly in the east of Poland. It will bring about a ca. 25% increase in the employee headcount (some 2.4 thousand people). The goal of this exercise is to increase market share in loans and deposits to 10% from 6%. CEO Mateusz Morawiecki also hopes to double BZ WBK’s share in the mortgage loan market (now ca. 3%). The CEO estimates that the bank’s second-quarter net income will be 10% higher than a year earlier, when it stood at PLN 250m. We did not consider expansion on such a scale in our earnings projections for BZ WBK, and assumed that the bank would open 100 new branches in the next three years. Setting up 250 outlets entails higher costs and larger staff upsizing than we predicted. But such larger costs will potentially be offset by improved income generated through better exposure to markets not covered to date. The expansion will influence earnings for the next two years.

BRE Bank Securities

5 July 2007


Analyst: Marta Jeżewska12 Last Recommendation: 2007-07-05(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 1 026.4 1 173.2 14.3% 1 336.9 14.0% 1 497.0 12.0% Number of shares (m) 130.7Interest margin 3.0% 3.1% 3.2% 3.4% MC (current price) 16 071.1Revenue f/banking oper. 2 096.3 2 298.4 9.6% 2 583.6 12.4% 2 848.5 10.3% Free float 25.0%Operating profit 801.8 857.8 7.0% 1 075.4 25.4% 1 269.4 18.0%Gross profit 796.3 832.1 4.5% 820.1 -1.4% 1 007.5 22.8%Net prof it 657.1 664.3 1.1% 816.0 22.8% 964.5 18.2%


Current price: PLN 123 Target price: PLN 109Handlowy (Reduce)

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Bank Handlowy WIG

Bank Handlowy reported excellent earnings for the first quarter. We assume that the growth trend in the bank’s operating income before provisions will continue in the second quarter, driven by both the Retail, and the Corporate lines. Costs should also remain under control, although increasing bond yields might slightly hurt the FQ2 figures. The other eight banks in our coverage universe increased the share of financial income and capital gains in the total banking income to 9.5% in FQ1’07. In case of Bank Handlowy, this ratio is close to 21%. Bank Handlowy’s stock fell 5.4% since our last Monthly Report, prompting us to upgrade from Sell to REDUCE, with a reiterated advice to take profits on the stock.

ING BSK reported very good FQ1 earnings performance, showing a 32% y/y increase in operating income before provisions. Our forecast for FY2007 predicts an over-37% improvement. We believe that the rosy earnings outlook is already priced in the bank’s stock. Earnings growth will be generated mainly from the rebounding Corporate business, as well as good exposure to investment funds. In turn, Retail will lag behind competition. We are reiterating a REDUCE rating on ING BSK.

Analyst: Marta Jeżewska017 Last Recommendation: 2007-06-06

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 936.3 1 081.8 15.5% 1 242.5 14.9% 1 393.0 12.1% Number of shares (m) 13.0Interest margin 2.1% 2.1% 2.1% 2.1% MC (current price) 13 985.8Revenue f/banking oper. 1 755.4 2 079.6 18.5% 2 366.3 13.8% 2 625.9 11.0% Free float 18.5%Operating profit 539.6 741.5 37.4% 917.7 23.8% 1 071.4 16.8%Gross profit 705.6 753.3 6.8% 774.5 2.8% 886.4 14.5%Net prof it 591.4 619.4 4.7% 708.9 14.4% 827.3 16.7%

ROE 16.2% 15.9% 16.8% 17.8% Price change: 1 month 3.8%P/E 23.7 22.6 19.7 16.9 Price change: 6 month 38.5%P/BV 3.7 3.5 3.2 2.9 Price change: 12 month 72.3%D/PS 27.5 27.9 23.8 27.2 Max (52 w eek) 1 075.0Dyield (%) 2.6 2.6 2.2 2.5 Min (52 w eek) 609.0

ING BSK (Reduce)Current price: PLN 1075 Target price: PLN 953.5

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ING BSK WIG

BRE Bank Securities

5 July 2007


Analyst: Marta Jeżewska011 Last Recommendation: 2007-07-05(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 780.0 878.6 12.6% 1 002.5 14.1% 1 123.0 12.0% Number of shares (m) 271.7Interest margin 3.6% 3.8% 4.0% 4.2% MC (current price) 7 606.4Revenue f/banking oper. 1 202.8 1 336.3 11.1% 1 509.0 12.9% 1 687.5 11.8% Free float 14.5%Operating profit 439.8 422.4 -4.0% 528.9 25.2% 645.3 22.0%Gross profit 321.4 460.6 43.3% 375.8 -18.4% 456.0 21.3%Net prof it 468.1 304.4 -35.0% 369.4 21.3% 452.6 22.5%

ROE 24.8% 13.9% 15.2% 16.7% Price change: 1 month 10.2%P/E 16.2 25.0 20.6 16.8 Price change: 6 month 31.1%P/BV 3.6 3.3 3.0 2.7 Price change: 12 month 67.2%D/PS 0.2 0.4 0.4 0.6 Max (52 w eek) 28.0Dyield (%) 0.8 1.3 1.4 2.2 Min (52 w eek) 15.0

Kredyt Bank (Under Review)Current price: PLN 28 Target price: -

Sales figures suggest that Kredyt Bank had a successful second quarter, rendering our FY2007 net income estimate overly conservative. Intense efforts to increase sales, paired with a tightening partnership with other KBC companies (Warta, KBC TFI), make for a promising bottom line outlook. ING BSK continues to expand its product offering, especially on the Retail front, and does so while keeping cost growth at a pace close to the inflation rate. Pre-tax income could receive an additional boost from NPL provision reversals as the bank steps up its debt recovery efforts. Our long-term forecasts assume that ING BSK's cost of risk will be on a par with other banks’, or even lower in the next few quarters. As the second-quarter earnings season approaches, we expect a revision in the bank’s full-year earnings guidance. Our investment rating on Kredyt Bank is under revision. FQ2 mortgage loan sales top PLN 1 billion ING BSK sold mortgage loans worth PLN 1 billion in the second quarter. In FQ1’07, the bank extended 3.9 thousand home loans with a total value of PLN 532m, marking a whopping 82.7% increase on FQ1’06. A sales preview in April pegged the full-year sales at over PLN 2.5bn. A KBC manager said that the objective of maintaining a 7%-8% market share in new sales might not be achieved this year. Hence, the market could not have expected such a huge surge in sales. In our valuation model, we assumed FY2007 mortgage loan sales at 2.5bn for Kredyt Bank, which, assuming a market total of PLN 57bn, would make for a 4.4% share in new sales. We might have to revise this view after the second-quarter earnings release. Sales of PLN 1 billion represent an 87% increase on FQ2 2006. Historically, FQ1’06 sales were PLN 291m, up to PLN 535m in FQ2’06, compared to PLN 532m in FQ1’07 and PLN 1 billion in FQ2’07. All this paints a very bright second-quarter earnings picture. Tapping into household savings Belgium’s KBC is committed to increasing market share to ca. 10%, and those plans include its insurance subsidiary Warta whose market share is currently a little over 3%. One way to fulfill this goal is for Warta, Kredyt Bank and the investment fund company KBC TFI to launch a joint offer. Two such campaigns are in the making. KBC TFI is also working to up its market share. According to VP Piotr Habiera, the AUM of the KBC TFI investment funds will reach PLN 5bn in June. Mr. Habiera also said that, like in the first quarter, the Kredyt Bank group grew faster than the market in the second quarter in household savings. In our view, this indicates an acceleration in product sales growth, which will be reflected in the bank’s volumes. This is excellent news, especially when coupled together with the fact that the bank also outpaces the market in lending growth. Supervisory Board member delegated to Management Board Mr. Andrzej Witkowski, Chairman of Kredyt Bank’s Supervisory Board, was temporarily delegated to the Management Board. We think that this might be the beginning of the management reshuffling that we have been waiting for since Mr. Konrad Kozik and Mr. Bohdan Mierzwiński left the bank.

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Kredyt Bank WIG

BRE Bank Securities

5 July 2007


Analyst: Marta Jeżewska16 Last Recommendation: 2007-06-06(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 650.5 762.3 17.2% 921.8 20.9% 1 107.8 20.2% Number of shares (m) 849.2Interest margin 2.8% 2.8% 2.8% 2.9% MC (current price) 11 803.6Revenue f/banking oper. 1 253.0 1 535.1 22.5% 1 866.1 21.6% 2 205.3 18.2% Free float 34.5%Operating profit 409.4 565.2 38.1% 767.1 35.7% 1 005.4 31.1%Gross profit 709.7 370.7 -47.8% 473.1 27.6% 639.6 35.2%Net prof it 300.8 383.2 27.4% 518.0 35.2% 684.7 32.2%


Millennium (Sell)Current price: PLN 13.9 Target price: PLN 10.5

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Millennium WIG

Millennium is going to kick off the bank industry’s second-quarter earnings season on July 23rd. We expect strong performance underpinned by booming fundamentals. Business income should be good, while operating income will be impacted by expansion costs (although the bank has to date surprised on the upside on the cost front) and provision charge-offs. Less intense debt recovery efforts, paired with a strong lending business (requiring recognition of IBNR reserves), could hoist the charge-offs higher. Millennium trades on a ’07 P/E of 29.8, displaying a 31% premium to the sector average. Even assuming the highest possible net income CAGR for the next three years (FY09/06 CAGR=31.5%), the ’09 P/E estimate of 16.7 is still higher than the peer average (4%). We advise investors to take profits on Millennium shares, and reiterate a SELL rating on the stock. New strategy Millennium’s old strategy pegged the FY2008 ROE and C/I ratio at 15% and 65% max respectively. The bank’s estimates were made taking into account the network expansion and rebranding plans revealed early last year (160 new branches including 40 to be redesigned). Amidst a booming market environment, by fully leveraging the industry’s most attractive product offering and keeping a tight rein on expansion costs, Millennium succeeded in achieving its financial targets one year ahead of the plan. On June 1st, the bank revealed a new strategy developed as part and parcel of the strategy adopted across the BCP group. ROE and C/I ratio targets were revised to 20% and 55% max respectively, to be achieved in FY2009. Millennium also raised its sales targets. Retail will work to acquire approximately 400,000 new clients (from 800,000 now to 1.2 million, a 50% increase). As regards the key product, mortgage loans, Millennium aims to achieve a 12% share in the total portfolio of these loans, and keep its Top-3 position (in all sales, not only new sales as previously). To succeed, the bank will have to keep growing faster than the market for the next three years (its current share in the mortgage loan portfolio is 10.5%). In credit cards, the target market share is 8%, and cash loan sales are set at PLN 2 billion in FY2009and PLN 1 billion in FY2007, with an assumed intermediate goal of PLN 1.5bn in FY2008 (this is our assumption). Growth in the Retail segment is also partly generated by investment funds, where Millennium hopes to achieve a 6% market share and move into the top five in terms of AUM - goals that also require above-average growth in the next three years (market share currently stands at 4%). In the Corporate segment, Millennium basically left its old targets intact: to acquire 1500 new SME clients annually, increase income by 20% a year, and gain a 7% piece of the market pie. Income growth is to be driven by new accounts and lease financing, as well as a broader product offering, including factoring services and cash management products.

BRE Bank Securities

5 July 2007


Analyst: Marta Jeżewska016 Last Recommendation: 2007-06-06(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 2 377.0 2 552.4 7.4% 2 824.9 10.7% 3 094.0 9.5% Number of shares (m) 167.0Interest margin 3.7% 3.6% 3.7% 3.8% MC (current price) 44 591.1Revenue f/banking oper. 4 656.4 5 047.6 8.4% 5 563.2 10.2% 6 117.2 10.0% Free float 43.1%Operating profit 2 335.2 2 656.8 13.8% 3 087.6 16.2% 3 545.7 14.8%Gross profit 1 873.6 2 203.8 17.6% 2 572.8 16.7% 2 991.9 16.3%Net prof it 1 787.5 2 081.7 16.5% 2 421.2 16.3% 2 775.0 14.6%


Current price: PLN 267 Target price: PLN 269Pekao (Hold)

We are still waiting for an official OK to the BPH spin-off and the BPH/Pekao merger. Bank supervision is taking its time, raising concerns over possible delays in both the merger itself, and the synergies it is expected to bring to Pekao. But, in our opinion, the impact of such delays will not be terribly harmful. Our target per-share price on Pekao’s stock (PLN 269) was calculated based on its valuation “as is,” i.e. without taking into account the merger or the placement of stock consideration to BPH’s shareholders (our usual approach) to which we added the expected cost and revenue synergies. Without those synergies, the target would be closer to PLN 256 per share. Going back to the delays, they are obviously not good for the process, but they do not affect the synergies achievable on the merger. In the near term, Pekao’s stock will rally on strong FQ2 earnings performance driven by cash inflows to investment funds, good exposure to Retail, and accelerating corporate lending. We are reiterating a HOLD rating on Pekao. Pekao files prospectus Pekao filed the prospectus with the Polish Financial Authority (KNF) as scheduled, but this punctuality will do nothing to speed up the merger process as the bank continues to wait for official clearance to conduct the BPH spin-off and incorporate the remaining portion. After a recent change in the position of the President of the General Inspectorate for Bank Supervision (GINB), Pekao will probably be asked to submit more documents, and the new GINB Head Alfred Janc will have to take time to acquaint himself with the thousands of pages of merger documentation. Added to this are UniCredit’s negotiations with GE Money regarding the acquisition of the Mini-BPH. Because GE Money will have to hold a tender offer for the Mini-BPH’s outstanding shares, a solution is needed to ensure that it does not pay more for such shares than it is going to pay for the 71.3% stake acquired from UniCredit. Pekao and BPH are ready to combine their operations. In our view, Pekao’s current market value does not factor in the merger yet. GINB analyses not ready yet The analyses are needed to review the BPH spin-off clearance request filed in January. A delay is a given at this point, but it will not affect our positive outlook on Pekao, which reports consistently strong financial performance. The post-merger savings potential is also intact, except that they might be achieved later than originally hoped. Unfortunately, the delays will have some implications for BPH. BPH’s shareholders stand to benefit from two sources of cash flows: Pekao shares and the selling price of the Mini-BPH, and it looks like they will have to wait longer to get these assets. What is more, BPH could face erosion of business as it continues to wait for the spin-off. GA called after supervisory board resignations Pekao called a general meeting of shareholders for July 25th to appoint new supervisory board members and amend the bylaws. The meeting is necessitated by two resignations: Andrea Moneta and Jerzy Starak. Andrea Moneta was formerly in charge of UniCredit’s Polish operations, but his stepping down is not due to any problems in the local market. His replacement is Mr. Federico Ghizzoni, already appointed as member of BPH’s supervisory board. We do not know the reasons behind Mr. Starak’s resignation. Overall, these developments should not affect Pekao’s stock performance. Merger in the Ukraine UniCredit Ukraina and HVB Ukraina signed an agreement to merge by the end of the year. This should come as no surprise to investors given the activity leading up to this deal. Good news for Pekao as owner of the new company.

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Pekao WIG

BRE Bank Securities

5 July 2007


Analyst: Marta Jeżewska016 Last Recommendation: 2007-05-31

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Net interest income 3 808.7 4 444.8 16.7% 5 143.3 15.7% 5 986.8 16.4% Number of shares (m) 1 000.0Interest margin 3.9% 4.2% 4.4% 4.7% MC (current price) 55 900.0Revenue f/banking oper. 6 038.9 7 015.9 16.2% 7 990.5 13.9% 9 098.0 13.9% Free float 43.1%Operating profit 2 705.8 3 571.3 32.0% 4 273.7 19.7% 5 159.9 20.7%Gross profit 2 167.0 2 701.5 24.7% 3 316.1 22.8% 3 868.6 16.7%Net prof it 2 149.1 2 610.1 21.5% 3 042.5 16.6% 3 674.9 20.8%


PKO BP (Hold)Current price: PLN 55.9 Target price: PLN 54.4

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PKO BP WIG

We welcomed the two management board appointments and the nomination of Rafał Juszczak to the position of PKO BP’s CEO. A complete management board is a guarantee of fulfillment of the bank’s new six-year strategy. We expect strong FQ2 sales figures from PKO BP even despite the management reshuffling, driven mainly by mortgage loans and SME financing facilities. We would like to see more robust growth in retail lending and corporate loans, and, while this is entirely possible in case of the former, an acceleration in the latter will not happen until the bank comes up with a better financing offer for businesses. The PKO BP investment funds, which are gradually picking up momentum, will no doubt have a handsome share in the FQ2 earnings. Strong sales will drive interest- and fee income, but operating income could be affected by higher bond yields bringing the value of the debt portfolio to the negative territory. We are reiterating a HOLD rating on PKO BP. Rafał Juszczak named CEO Rafał Juszczak, acting CEO since March and Management Board member since July 1st, 2006, was appointed as PKO BP’s new CEO. The supervisory board also appointed four VPs: Ms. Aldona Michalak (put in charge of quality assurance as of July1st), Mr. Mariusz Klimczak (in charge of corporate banking as of July 15th), Mr. Adam Skowroński (in charge of finance and accounting as of July 23rd), and Ms. Berenika Duda–Uryn (HR management as of September 10th). Marek Głuchowski said that there is still an IT management vacancy left in the board. The CEO appointment is in line with expectations. We welcome the fact that Mr. Juszczak was involved in developing PKO BP’s new strategy, and was the one to present it to shareholders We are also glad the four management board vacancies are finally filled. Three of the new VPs (except for Ms. Berenika Duda–Uryn) have a history with PKO BP. Their nominations are consistent with their expertise. Now that the management board is complete, the 2007–2012 strategic targets have a better chance of being fulfilled.Eight out of the nine positions prescribed in the bank’s bylaws are filled, and there is still one spot waiting for someone to head IT. FQ2 better than a year ago CEO Rafał Juszczak said that the bank’s second-quarter earnings results will be better than a year ago, and will have followed the same trends as observed in the first quarter. We agree. Net income in FQ2 2006 was PLN 471m, and, in FQ1 2007, it was already PLN 672m. The FQ1’07 net income chalked up a 40% increase on FQ1’06, among others thanks to (aside from a fast-paced business) low costs and debt recovery efforts. Second-quarter growth will be impacted by cost of risk, higher expenses (upped recently), and higher bond yields. While we are sure that PKO BP’s FQ2’07 earnings results will be better than a year ago, we have doubts whether they will display much quarter-on-quarter improvement. Strategy implementation PKO BP appointed 16 dedicated teams to manage 28 new initiatives, including three teams dedicated to the corporate segment, where the bank admits to being behind competition. PKO BO is recruiting experts to implement new products like factoring, cash management, e-banking, and a special hotline for business clients. The bank is also preparing to roll out the ZSI system throughout its entire branch network. Only four are working on the ZSI so far. The rollout will start in August, and end in 2008. The ZSI will facilitate the establishment of special accounting centers that will help generate savings and downsizing. The bank plans to reduce staff by 1500 people a year, including through voluntary leave schemes. We welcome the fact that PKO BP is finally setting about to bringing the strategy into effect. We believe that it is fully capable of achieving most, if not all of the objectives it set for itself. The layoff plans were disclosed a long time ago.

BRE Bank Securities

5 July 2007


Key strategic goals The three main targets of the new strategy as pinpointed by the new CEO are human resources management, roll-out of the central computer system (ZSI), and an acceleration in sales. The first goal will involve staff reductions (depending on the ZSI rollout) as well as development of a new incentive system. The bank reiterated its plan to reduce the headcount by 1500 people a year through 2008, but adds that it will probably launch a voluntary leave program next year. After 2008, the scale of the layoffs will increase. As for sales, more emphasis will be placed on the Corporate business. CEO committed to develop the Corporate business PKO BP intends to assume lead of the market among others by targeting government-owned companies. The corporate business is very important for the new CEO. While the bank has an established presence in Retail, there is still much to be done to attract business clients. PKO BP’s Corporate business line is the source of a significant growth potential. While Retail no longer has much capacity to increase market share, there is a large piece of the corporate pie to be had. Thanks to the majority shareholder and large geographic coverage, PKO BP has excellent exposure both to large businesses, and SMEs. The SME portfolio has displayed healthy growth for some time, but the offer directed to the more demanding prospects has to be significantly revamped. Loan agreement PKO BP signed a ten-year PLN 250m loan agreement with “Operator Logistyczny Paliw Płynnych.” This is proof of the bank’s capacity to take advantage of the momentum in the corporate segment, with special focus on government-owned companies. ZSI rollout The ZSI rollout is not expected to affect costs considerably in the next few quarters as the expenses it entails will be offset by the savings generated on centralized processes. Robert Działak says that if the ZSI is implemented at all PKO BP branches by the end of 2008, it will be a big success. The main cost impact will hit the bank in 2009-2010, but it will go hand in hand with centralization savings. Again, the bank did not provide us with any cost estimates. We predict that amortization charges will soar in the years ahead. The double-digit income growth target in the new strategy was set taking into account the ZSI costs. Our net income forecasts are in line with the bank’s guidance. Moving into insurance An insurance business can help PKO BP maintain its leading market position. The bank does not intend to wait until it is allowed to join forces with PZU to form a banking and insurance organization, and plans to start its own insurance company. However, Rafał Juszczak is all in favor of the idea to form a national finance group that would include PKO BP, Bank Pocztowy, BGK, and PZU. We have big reservations as to PKO BP’s insurance plans. To create value adequate to the bank’s, a large organization is needed that, however, will be hard to develop in a fiercely competitive market with such established players as PZU, especially considering that the government would then become the owner of two competing firms. Capital injection plans Marek Głuchowski, Chairman of PKO BP’s supervisory board, said that the bank was considering making capital injections of around PLN 15bn in a five-year horizon, and pondering moving into the insurance business. Additional capital is not needed yet this year. This is one of the 28 initiatives set out in the new strategy. One solution would be a new stock offering. Mr. Głuchowski also reiterated that the bank wants to expand outside of Poland. In our view, such huge capital proliferation plans (PKO BP’s equity at FQ1’07 stood at PLN 10.8bn) can be treated as a harbinger of an equally considerable acquisition. The bank is keeping a tight lid on such plans for now. Capital needs There is no need for a capital injection yet this year, but such a need could arise next year to support the bank’s robust lending business (according to the CEO, monthly mortgage sales currently stand at PLN 1.5bn, and annual sales are expected to exceed PLN 15bn) and comply with the CAR requirements set by Basel II. PKO BP will take out a CHF mortgage loan. Next year’s capital needs could be satisfied through a stock offering. Naturally, the government has to keep an over-50% stake in the bank after such an offering. PKO BP seeks controlling stake in Bank Pocztowy PKO BP is negotiating the terms of Bank Pocztowy takeover with the Polish Post Office. PKO BP’s current stake is 25% plus one share. The Polish Post owns the rest. The negotiations are for a 25% stake minimum to give PKO BP control. By selling its shareholdings, the Polish Post would raise the capital needed to carry out a restructuring. Marek Głuchowski that this might be

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5 July 2007


achieved through a small stock placement to Bank Pocztowy’s employees. Bank Pocztowy has PLN 2bn assets and PLN 165m equity, while PKO BP's equity is PLN 9bn, and assets are over PLN 100bn. The talks are definitely not about assets but, rather, post offices. The two banks already cooperate in selling products and services and PKO BP has access to PO outlets. By taking over control, PKO BP would in a way make it easier for itself to carry out its strategic plans, which investors should welcome as good news. Aside from owning Bank Pocztowy, PKO BP is also thinking about working together with cooperative banks (it is unclear on what terms). In our view, acquisition of Bank Pocztowy, although a smart move, would not have much impact on PKO BP’s consolidated accounts. Also, the bank’s new strategy factors in the partnership with the Polish post, with financial targets partially conditioned on this cooperation. The potential takeover will not influence our financial projections for PKO BP. Bank Pocztowy sets up new PO stands Bank Pocztowy has set up 345 financial service points at post offices to date. This number will be 1.2 thousand by the end of the year, and 3.3 thousand by 2009. Most of the stands use payment terminals operated by PKO BP’s subsidiary e-Service. Bank Pocztowy’s growth agenda is to develop the sales network through PO outlets without opening new independent branches in addition to the 60 already in place. The bank also launched electronic banking services on June 1st, and plans to develop the functionality of the “Pocztowy 24” e-banking system. The remote banking service was developed jointly with Inteligo Financial Services S.A., also member of the PKO BP group. Bank Pocztowy currently manages over 170 thousand accounts, but hopes to attract more clients through the partnership with the Polish Post Office. PKO BP subsidiaries are joining forces to grow Bank Pocztowy, which, for now, plays an immaterial role from PKO BP’s earnings standpoint. PKO BP set to conquer new markets In addition to opening branch offices in the UK and expanding through Kredobank in the Ukraine, PKO BP also wants to establish a presence in other markets including Russia, Romania, and Belarus by acquiring banks there. The goal is to achieve a significant position in each of these countries, says CEO Rafał Juszczak. PKO BP plans to make a $35m capital injection in its Ukrainian subsidiary, and increase market share from 2% to 10%. We are skeptical about the acquisition plans for the Russian and Belarusian markets. Bulgaria is a possibility, but we have heard many times before about PKO BP’s international expansion plans (the bank even made bids for a Romanian and a Serbian bank) which, however, never actually materialized. We believe that, by allocating resources to international markets, the bank will lose focus on the growth prospects that present themselves locally. The international agenda is PKO BP’s response to the Pekao/BH merger and loss of leading positions in many markets to the enlarged Pekao. Loan sales going strong PKO BP sold PLN 2.89bn-worth of mortgage loans and PLN 1bn in consumer loans in April and May, and hopes to generate over PLN 5 billion from consumer loans by the end of the year. PLN 1.445bn in monthly home loan sales is an excellent result and one that is in line with the bank’s agenda to increase sales in FY2007 relative to FY2006 to at least PLN 1.2bn a month. In turn, FQ1 consumer loan sales disappointed investors: retail loans excluding home loans and HNWs rose a mere 9% y/y and fell 4% q/q despite efforts to accelerate growth. The growth rate including HNW clients amounted to 20% - also a less-than-stellar result, surprising for a bank with a broad exposure to retail clients like PKO BP’s. We hope that sales pick up going forward. Retail loans up over 10% PKO BP hopes to grow its retail loan portfolio by over 10% in FY2007. YTD, the bank has sold PLN 2.2bn in cash loans, and PLN 6.5bn in mortgage loans. The target for cash loans is PLN 5bn-plus. PKO BP is going to launch a special offer for seniors in the second half of the year. The number of credit cards in circulation is expected to exceed the 1 million mark. After FQ1’07, that number stood at 943,000, and increased to 960,000 by the end of May. For FY2007, we expect retail loans to increase 25%. The bank’s targets are in line with our forecasts. PKO Inwestycje partners with Polish Rails A year ago, the Polish Rails (PKP) and PKO Inwestycje (subsidiary of PKO BP) signed a Letter of Intent regarding building projects. Now, the partners are preparing a project in Warsaw. PKP will contribute 24 ha of land, and the bank will provide the cash and know–how. The work will start toward the end of next year, after the site is cleared and all necessary permits are obtained. Initially, construction work will take place on 6 hectares, but we have no clue what exactly the two firms will be building there (the architectural plans are yet to be developed). CEO Rafał hopes that PKO BP and PKP will tighten their business relationship. The national rail operator owns a lot of land all over Poland, and is looking for investors. PKO Inwestycje’s real-estate development business leaves a mark on PKO BP’s consolidated income and costs. The projects referred to above will last for the next few years, spanning beyond our forecast horizon. We think that PKO Inwestycje will be contributing to the group’s income over the next few years.

BRE Bank Securities

5 July 2007


Inteligo moves to Ukraine, launches MVNO business Ukraine’s Kredobank will soon launch a mobile telephony and electronic banking services. Inteligo will unveil its offering late this year. The MVNO services will be targeted mainly to PKO BP and Kredobank clients, and the plan is to acquire more than 50 thousand users. The bank is about to finalize talks with Polkomtel. Inteligo’s electronic banking services have 2.1 million users, of which 0.6 millions are its own clients, and the rest are PKO BP clients. By the end of the year, the number of accounts is expected to increase to 2 million. The bank has been reported to be negotiating with an operator for some time. Mobile telephony is an added-value service rather than a legitimate attempt at garnering market share. MVNO is not going to have much impact on Polish operations, but it might be different in the Ukraine. We welcome the plans to develop Kredobank. The plans to launch electronic banking in the Ukraine date back to PKO BP's former VP in charge of Retail, Jacek Obłękowski.

BRE Bank Securities

5 July 2007


Gas & Oil, Chemicals Azeri oil enough to feed Odessa-Płock pipeline? The Azerbaijani oil company Socar made an assertion that its crude oil reserves amount to 1.35 billion tons, meaning that it can increase output and open new export channels. This means that the Odessa-Brody-Płock pipeline project could be pulled off even without involvement by Kazakhstan (Socar extracts ca. 8.8 million tons of oil a year), although the latter will not leave Azerbaijan’s declaration without a response. This raises questions about investments in Azeri deposit exploration and purchase guarantees that will be expected of Polish refineries after the pipeline is up and running. It is no secret that Caucasian oil producers want to gain interests in the refining sector, and will probably propose to purchase stakes in Polish refineries. Russia to launch Rebco futures trading During the Saint Petersburg economic forum, an agreement was signed to establish a commodity exchange in the city that will trade in Rebco oil futures (scheduled for mid-2008) with an aim of tightening the Urals-Brent differential. In our opinion, this exchange will not manage to change the spread between the high-sulfur Russian crude and Brent. All previous attempts at narrowing it were a fiasco as the only way to do this is to enhance Urals’s export quality (by not mixing it with lower-grade crude types). But one reason that makes the Saint Petersburg exchange a viable idea is to increase Primorsk’s transshipment capacity, translating into a more significant role of spot contracts on Russian oil deliveries that will probably be indexed to the futures. OMV’s hostile move on MOL After increasing it shareholding interests from 10% to 18.6%, Austria’s energy giant OMV is determined to take over its Hungarian counterpart, MOL. But MOL’s management have no interest in a closer relationship with OMV, and do not intend to help the Austrians, and neither does the Hungarian government which officially announced that it is going to do everything in its power to stop the acquisition. But we cannot rule out that OMV will hold a tender offer for MOL’s shares and get its hands on a majority stake against MOL’s will, especially if we consider the press reports that financing is already in place to make such a move. US gasoline inventories on a downturn The US Department of Energy reported that the country’s gasoline inventories fell by 0.75 million barrels in the week ended June 22nd, contrary to the market’s expectations of a 1mmbbl increase. Although refiners increased their capacity utilization rates by 1.8 ppts, output remained flat (on the same level as in the period when the CUR was decreasing) as refineries, troubled by plant failures, struggled to keep it from falling by using third-party semi-finished products. Now that the plants are operational again, refiners reduced purchases of these products to not overload the limited capacity. Flat production, persistently high demand, and a decline in imports from 1.3mmbbl to 1.1mmbbl were the determining factors of the US gasoline market's performance last week. We still expect gasoline prices to accelerate in July and August, and drive refinery margins.

BRE Bank Securities

5 July 2007


Analyst: Kamil KliszczLast Recommendation: 2007-05-09

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 12 812.7 11 932.5 -6.9% 11 814.3 -1.0% 14 547.6 23.1% Number of shares (m) 113.7EBITDA 1 101.7 1 027.5 -6.7% 985.1 -4.1% 1 344.6 36.5% MC (current price) 6 145.5EBITDA margin 8.6% 8.6% 8.3% 9.2% EV (current price) 6 172.6EBIT 804.3 650.9 -19.1% 474.4 -27.1% 707.9 49.2% Free float 41.2%Net profit 666.1 491.6 -26.2% 326.0 -33.7% 483.5 48.3%

P/E 9.2 12.5 18.9 12.7 Price change: 1 month 12.4%P/CE 6.4 7.1 7.3 5.5 Price change: 6 month 20.1%P/BV 1.2 1.1 1.0 0.9 Price change: 12 month 15.7%EV/EBITDA 5.4 6.1 7.2 5.8 Max (52 w eek) 56.1Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 38.5

Lotos (Hold)Current price: PLN 54.1 Target price: PLN 45.8

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Lotos WIG

We expect good FQ2 results from Lotos (with net profit at over PLN 300m), that is why we advise to HOLD its shares even despite the recent rally. In a longer term, investors will probably start discounting the decline in the returns expected to be generated on the PKRT upgrade program after Lotos backed out of the IGCC project (the expected PKRT benefits are smaller, while the capex is the same). Other downside factors include a hazy explanation for the change in the company’s approach to accounting for minority profits from Petrobaltic (leading to overblown profits for the parent’s shareholders), and weak first-quarter earnings (due to a revamping carried out while capacity utilization was max). PKRT scaled back without cutting costs Lotos signed a contract for its Comprehensive Technological Upgrade Program (the Polish abbreviation is PKRT). The company confirmed that it is putting IGCC facilities on hold, and projects expected to be completed by 2010 will include oil distillation, diesel oil hydrodesulphurization, hydrocracking, hydrogen generation, and heavy residue processing (ROSE) facilities designed to help Lotos increase its capacity to 10.5 million tons a year. It follows from the announcement that Lotos’s management wants to spend approximately PLN 5.6bn by 2012, exactly the same amount as was estimated before the IGCC project was dropped. Such an increase in costs means that we have to revise our expectations as to Lotos’s post-CTUP output without lowering the capex forecast (the IGCC facilities would have contributed greatly to the capacity improvements, and this gap will not be filled even by higher margins on asphalts). More asphalt Lotos hopes to sell 1 million tons of asphalt this year (ca. 785,000 tons a year ago), and upgrade capacity to 1.3 million tons a year in three years’ time, and through this become a top-three producer in Europe. Even after the recent increase in asphalt prices in Poland, we do not expect a significant contribution from this business line to the consolidated earnings.

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 15 676.5 17 062.0 8.8% 17 300.1 1.4% Number of shares (m) 5 900.0EBITDA 2 900.9 3 089.4 6.5% 3 707.6 20.0% MC (current price) 30 208.0EBITDA margin 18.5% 18.1% 21.4% EV (current price) 28 337.2EBIT 1 465.2 1 510.9 3.1% 2 064.7 36.7% Free float 15.3%Net profit 1 148.9 1 242.3 8.1% 1 703.0 37.1%

P/E 26.3 24.3 Price change: 1 month 4.5%P/CE 11.7 10.7 Price change: 6 month 45.9%P/BV 1.5 1.5 Price change: 12 month 49.3%EV/EBITDA 10.1 9.6 Max (52 w eek) 5.1Dyield (%) 2.9 3.0 3.3 Min (52 w eek) 3.1

PGNiG (Suspended)Current price: PLN 5.1 Target price: -

PGNiG can bid for Norwegian gas deposits, might receive handsome EU grants The Norwegian government does not intend to use its right of first refusal in Norwegian shelf deposits, meaning that the door is open for PGNiG to negotiate. This marks the fulfillment of another condition precedent to the agreement between PGNiG and ExxonMobil. Newspapers also reported in June that PGNiG might get a share of the EU grants toward infrastructure and environmental protection currently being allocated. Gas storages and an LNG terminal were put forth by the Economy Ministry as projects that will increase Poland’s energy safety. According to Puls Biznesu, allocations toward gas projects (including pipeline expansion by Gaz-System) will exceed EUR 1 billion. The EU funds will be a great help for PGNiG which might be able to set aside some cash to finance gas deposit purchases as a result. Gazprom cutting prices? According to press reports, Gazprom has cut the average price of the gas it exports to Europe by over $50/1000 cubic meters. Newspapers interpreted this move as resulting in a real reduction in the prices charged to buyers. In our view, this is a wrong conclusion and PGNiG is not going to buy gas any cheaper. The downward adjustment in Gazprom’s budget was merely a result of internal revaluations, probably spurred by lower-than-expected crude prices to which gas prices are indexed. The fact is, that a warm winter trimmed gas demand and spot prices were not favorable to the Russian oil giant in the first months of the year.

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PGNiG WIG

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5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 52 867.2 60 600.5 14.6% 67 371.1 11.2% 67 393.6 0.0% Number of shares (m) 427.7EBITDA 4 684.7 6 048.7 29.1% 6 650.6 9.9% 6 740.7 1.4% MC (current price) 24 571.9EBITDA margin 8.9% 10.0% 9.9% 10.0% EV (current price) 36 218.6EBIT 2 576.6 3 013.9 17.0% 3 461.1 14.8% 3 318.8 -4.1% Free float 72.5%Net profit 1 986.0 2 079.0 4.7% 2 463.4 18.5% 2 352.5 -4.5%


PKN Orlen (Accumulate)Current price: PLN 57.5 Target price: PLN 61

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PKN Orlen WIG

Refinery fundamentals should continue to be favorable in the months ahead, with processing margins climbing even higher in July/August. The crude oil market will remain strong, which, given the close correlation between the prices of crude and PKN Orlen’s shares, will provide significant support to the company’s stock performance. In addition to robust macro settings, PKN’s new viable value-building strategy for Mazeikiu Nafta seems to have broken the spell of bad news coming from the eastern direction, and we expect announcements that PKN will sell Polkomtel shares and take Anwil public in a few months’ time. PKN Orlen’s stock surged 28% since our last rating, but, seeing more upside, we advise investors to ACCUMULATE. A strategy for Mazeikiu Nafta PKN Orlen revealed its value-building strategy for Mazeikiu Nafta. The main objectives are to increase EBITDA from $77m this year to $700m in FY2012 through upgrades that will take up a total $1.6bn (capacity rebuilding, hydrocracking facilities, propylene fractionation column, and a hydrogen plant). We will take the new strategy into account in our next valuation of PKN Orlen, but we wish to stress right now that the strategic objectives are feasible (even if the FY2012 margin target is higher than analysts’ consensus), and the $700m target on EBITDA is viable. 2007-2012 capex plan Pending a eurobond offering slated for late July (estimated value is EUR 1bn), PKN Orlen’s management revealed a CAPEX schedule for the entire group. The CAPEX budget for the years 2007-12 is PLN 21.18bn, of which PLN 4.6bn will be spent on value-building at Mazeikiu Nafta. Average annual expenditure in the six-year period is PLN 3.5bn, a little more than the PLN 3.4bn earmarked for the years 2006-09 (prior to the Mazeikiu acquisition). While there were no changes in the CAPEX value, PKN Orlen made some shifts in the order of the investment projects. Mazeikiu upgrades are given top priority, meaning that petchem investments are postponed by a year, in line with earlier announcements. In our opinion, the new CAPEX will not get PKN Orlen deeper into debt, as it will most likely be financed with operating cash flows. As an additional cash guarantee, the company is expected to sell its shareholdings in Polkomtel. Supervisory Board reshuffle As expected, the State Treasury made a few changes in the composition of PKN Orlen's supervisory board. Mrs. Małgorzata Ślepowrońska (now CIO at Ciech and supervisory board member at PLL LOT and Soda Mątwy), was appointed Chair. New members appointed to the board are Mr. Jerzy Woźnicki (independent candidate nominated by the State Treasury; ING NN’s candidate did not make the vote), and Ms. Agata Mikołajczyk (advisor to Ciech’s CEO). Shareholders reelected Mr. Raimondo Eggink (CU OFE’s independent candidate), Robert Czapla, Krzysztof Rajczewski, Marek Drac-Tatoń, and Zbigniew Macioszek. In conformity with the bylaws, an undisclosed ninth member was nominated by the State Treasury. Other matters reportedly discussed during yesterday’s meeting of shareholders included completion of the negotiations with ConocoPhillips (about to be rounded off), filing a bid for Latvian shelf deposits, and distribution of the FY2007 earnings. Everyone knew that a supervisory board reshuffle was inevitable, and that the new members are affiliated with Ciech is also no surprise. A green light to sell Polkomtel According to Parkiet, the government made an offer to Vodafone to amicably resolve the ownership dispute between Polkomtel’s shareholders. The government would sell PKN Orlen’s stake (19.61%) to Vodafone, and the other shareholders would buy back an equitable portion of the stake sold by TDC. If the offer is accepted, PKN Orlen would net over PLN 2bn on this deal.

BRE Bank Securities

5 July 2007


High rating from Moody’s Moody’s first rating on PKN Orlen is “Baa3 with stable outlook.” This is not very far from the A2 rating for Poland, and should be considered very good given the company’s huge debt incurred on the Mazeikiu Nafta acquisition. It also guarantees a satisfactory level of bond service costs on an upcoming offering.

BRE Bank Securities

5 July 2007


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ZA Puławy WIG

Puławy’s shares rallied over 22% since our last rating, prompting a downgrade from Buy to HOLD. The only possible driver at this time is if the management take decisive steps toward making an acquisition. Now that ZAP is no longer seen as the main integrator of the fertilizer industry (ZAT is scheduled to go public soon), it is not likely to sit and wait for what the government has to offer. Instead, it can look for potential targets in Bulgaria or Romania. A takeover of a leading chemicals producer there would cause a lot of buzz, and significantly boost market sentiment (if the price was right, of course). LoI agreement with “Bogdanka” copal mine, acquisition plans ZA Puławy and the Bogdanka mine signed a Letter of Intent to cooperate in a coal gasification plant project. In an interview for Parkiet, CEO Krzysztof Lewicki also shed some more light on future acquisitions. Puławy is looking at 10 potential targets, including Western European firms and companies in new EU Member States, with annual sales ranging from PLN 500m to PLN 1bn. The first small transaction (a company with PLN 100m sales) might take place next year. The CEO also confirmed that Puławy is interested in Polish chemicals producers. ZA Tarnów to go public in November According to newspaper reports, ZA Tarnów (“ZAT”) will be floated on the stock exchange in November, with the State Treasury eyeing ca. PLN 400m from the sale of its 60% stake in the company. If these reports are confirmed, the value of the share offering, including new shares issued to finance modernization, could reach PLN 900m. This form of privatization does not preclude a later sale of the balance 40% shares, for example, to ZAP, as part of an ongoing consolidation of the “Great Chemical Synthesis” plants. Management raises guidance ZA Puławy raised its earnings guidance for the business year ended June 30th. The new targets are PLN 131m for net profit, an EBITDA of PLN 255.5m, and an operating profit of PLN 155.8m. Our own forecasts are PLN 125.4m (-4%), PLN 255m (-0.2%) and PLN150.5m (-3%) respectively. We are confident that the new targets will be met in a booming fertilizer industry, underpinned by currency hedges.


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 2 228.1 2 264.5 1.6% 2 318.8 2.4% 2 513.3 8.4% Number of shares (m) 19.1EBITDA 255.0 268.4 5.3% 307.3 14.5% 385.4 25.4% MC (current price) 2 492.6EBITDA margin 11.4% 11.9% 13.3% 15.3% EV (current price) 2 236.7EBIT 150.5 160.6 6.8% 172.8 7.6% 235.0 36.0% Free f loat 38.4%Net profit 125.4 136.2 8.6% 146.1 7.2% 197.7 35.3%


Za Puławy (Hold)Current price: PLN 130.4 Target price: PLN 127.98

BRE Bank Securities

5 July 2007


Telecommunications Building alternative backbone networks The Polish government wants to spend 300 million euros on building backbone networks in eastern and central Poland (255m will come from EU grants). The goal is for 90% of all households and 100% of public institutions to have fast Internet access by 2013. The project is modeled upon a similar initiative to deploy a broadband network in the małopolska region. Commercial services based on such regional backbones will be provided by telecom operators whose access networks can guarantee download speed of 6 Mb/s and upload speed of 1 Mb/s. The targets are similar for households. Today, 38% of households in the regions covered by the new initiative have no chance of having fast Internet access. The project provides that operators will build access networks at their own cost. Tenders for regional network contracts will be held between 2008 and 2009. They will be an opportunity for mid-sized local operators to strike partnerships with major international players, and the UKE will give them an upper hand in reviewing the bids. We view this initiative as one that will contribute to the telecom market’s growth rather than threaten existing operators (broader geographic coverage). Any negative implications will be for public administration which, for the most part, uses the services of TPSA. Streżyńska stays put Poland’s Supreme Administrative Court ruled that Ms. Streżyńska is to continue to serve as a lawful Head of the Office for Electronic Communications (UKE). This ruling puts an end to TPSA’s appeals based on the claim that her appointment was unlawful. It seems that the whole “Streżyńska” issue is resolved once and for all, and that TPSA is the loser. This changes nothing in our forecasts for the operator. PTC moves into fixed-line telephony PTC is about to launch fixed-line telephony services for TPSA customers based on a wholesale line rental arrangement. The UKE set the terms of cooperation between the two operators. PTC is yet another player on the increasingly competitive market, who will lead to margin shrinkage, especially in case of incumbent operators like TPSA and Netia.

BRE Bank Securities

5 July 2007


Analyst: Michał MarczakLast Recommendation: 2006-09-06

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 862.1 971.7 12.7% 1 088.0 12.0% 1 178.3 8.3% Number of shares (m) 389.2EBITDA -68.9 262.0 267.9 2.3% 301.4 12.5% MC (current price) 1 755.3EBITDA margin -8.0% 27.0% 24.6% 25.6% EV (current price) 1 558.3EBIT -341.4 16.8 27.5 63.7% 67.8 146.5% Free float 100.0%Net profit -378.9 -53.1 -86.0% -50.6 -4.6% 4.1

P/E 473.2 Price change: 1 month 0.7%P/CE 10.0 10.1 8.1 Price change: 6 month -4.0%P/BV 0.9 0.8 0.8 0.8 Price change: 12 month 2.5%EV/EBITDA 6.9 6.4 5.4 Max (52 w eek) 5.4Dyield (%) 2.8 1.7 1.7 2.7 Min (52 w eek) 3.7

Netia (Sell)Current price: PLN 4.5 Target price: PLN 3.8

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Netia WIG

We stand by our view on Netia as an investment pick (SELL). The upcoming earnings season will not bring any breakthrough, on the contrary, we expect to see even deeper losses on a consolidated basis, stemming from expenses incurred on a more forceful entry into the retail market, and, first and foremost, from the growing losses generated by Play. After an initial success, the management expects Play to lose momentum in new user acquisitions in an increasingly saturated market. We do not believe in the recent rumors that one of leading international players has targeted Netia and Play for acquisition, which spurred a rally on Netia’s stock. The one item of the FQ2 earnings results that may surprise on the upside is the increase in the number of users since the company started to sell its starter packs through the Germanos store chain. Local acquisition Netia acquired a 100% stake in “Magma Systemy Komputerowe Schmidt i S-ka Sp. z o.o.,” headquartered in Wrocław, for PLN 7.941m. Magma is a local network operator and provider of broadband services to consumers in Wrocław and the nearby Jelcz-Laskowice. Netia wants to offer its own voice and hosting services to Magma’s customers. As of June 25th, 2007, Magma had 6,328 Internet subscribers. This small acquisition changes nothing in our outlook on Netia, especially because its price does not leave much potential for growth. In the red until FY2010 According to Netia’s CFO, the company should generate a profit in 2010. P4’s loss this year will amount to PLN 500-600m. The mobile subsidiary is also expected to post a positive EBITDA in FY2010. Netia holds a 23% interest in the operator. This confirms that Netia’s financial standing will remain weak for a good few years. Germanos sales launched By “moving into” the Germanos chain, Play gained 312 sales outlets for its products. This number is to be increased to 450 outlets by the end of the year. Play stores now include 230 "PlayGermanos" outlets, 40 “Empik” stands, 37 "Arteria" outlets, and 5 “Playzone” stores. The pre-paid distribution network consists of 20 thousand outlets, to be increased to 100 thousand in the future. We remain convinced that the costs incurred on Play’s market launch will far exceed the benefits, and that Netia will not achieve its desired return on this investment. The next two quarters will see expanding losses and negative FCF.

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 18 625.0 17 871.2 -4.0% 17 892.6 0.1% 17 705.3 -1.0% Number of shares (m) 1 400.0EBITDA 7 856.0 7 289.2 -7.2% 7 360.8 1.0% 7 055.5 -4.1% MC (current price) 33 544.0EBITDA margin 42.2% 40.8% 41.1% 39.8% EV (current price) 40 699.0EBIT 3 367.0 2 986.3 -11.3% 3 246.6 8.7% 3 119.5 -3.9% Free f loat 46.0%Net profit 2 096.0 1 908.6 -8.9% 2 166.8 13.5% 2 060.4 -4.9%


TP SA (Reduce)Current price: PLN 24 Target price: PLN 20.2

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TPSA WIG

We are downgrading TPSA from Hold to REDUCE, and advise investors to take advantage of any buy-back rally to take profits. New operators are cropping up everywhere, offering broadband Internet access to TPSA’s customers under BSA arrangements (LLU will take effect in half a year), often extended to include VoIP. After a recent information leak blooper by one of the investment banks, investors should not look forward to a strategy announcement from TPSA in the FQ2 earnings season (November/December is our guess). We expect weak earnings figures from the operator. What is more, the UKE continues its crackdown against TPSA, with the cap on F2M call rates being the most painful of the recent measures. TPSA’s strategy according to Merrill Lynch, a response from the management According to Thomson Financial News, quoting a report by Merrill Lynch, TPSA is planning to cut its capex to 12% -13% of revenues instead of the 16% originally earmarked, and pay up to PLN 3 per share in dividends to shareholders this year. A confirmation of these plans would be a welcome development indicating that the operator is gearing up for a considerable revenue erosion (employment). The CAPEX cuts are reasonable, and would mirror the expenditure of other operators. The extra cash would amount to ca. PLN 700m a year. The question remains whether TPSA will be able to continue its sales strategy on such a curbed budget. One example of insufficient financing is the live.box which has only managed to garner some 10 thousand subscribers in six months. In response to these reports, TPSA’s management denied any plans to reduce the staff headcount or scale back capital expenditure. But we suspect that they will change their minds some time in the fourth quarter, after the ML incident blows over. If the partially leaked strategy is a “revolutionary” one, the management is sure to wait a few months with its unveiling. The plans for FY2007 were to remain intact anyway, and growth ideas for the more distant future can wait… unless the idea behind the planned strategy announcement was to boost investor sentiment after the FQ2 earnings release, which we expect to be weak. Going forward, TPSA’s stock might continue to rally on the current buyback and general sentiment. UKE ushers new operators into the BSA market The UKE did not accept TPSA’s new call rates for businesses. The regulator had the biggest reservations about free minutes granted as part of subscription plans – something that other operators are unable to offer at the current wholesale rates. After Tele2 announced the launch of a broadband offering targeted at TPSA subscribers (BSA) in July just days ago, Dialog followed suit. So far, some 67,000 people decided to change broadband providers under BSA arrangements, of which 63,000 chose Netia, and approx. 4,000 went for GTS Energis’s “Multimo.” During a press conference about new strategic goals, Tele2 announced its ambition to become the number one alternative provider of broadband services in Poland, without giving any specific projections. Our predictions for the Polish broadband market are starting to pan out. Given the increasing number of operators taking advantage of BSA, and in the future also LLU, profit margins in this segment will be far from impressive, and a widely advertised broadband strategy will not necessarily bring about growth even in revenues. TPSA expects good FQ2 results TPSA estimates that its first-quarter performance so far is better than in the first quarter. The operator will reveal a new strategy on the occasion of the FQ2 earnings announcement, and is keeping a lid on this year’s earnings guidance for now. The CEO is “surprised by how the telecom market is shrinking.” He assesses that, with the inflation rate at 3% and economic growth at 7%, the telecom market increases by under 1%. He stressed that TPSA would therefore focus on cost control. Looking at TPSA’s market environment (fierce competition, falling prices), investors would be very surprised if the company indeed showed better results

BRE Bank Securities

5 July 2007


than in FQ1 (PLN 518m net). Will TPSA be split? In July, Viviane Reding, the EU Commissioner for Information Society and Media, will reveal draft regulations aimed at allowing telecom regulators to split operators with dominant market positions into separate infrastructure and retail operations, to facilitate fair competition. This would be a measure of last report for regulators should all other avenues fail. If this revolutionary concept is approved, national operators like TPSA will face the possibility of being split up. We believe that the likelihood of this is small. It would certainly give the UKE another means to pressure TPSA, but to divide a telecom operator already privatized and sold to a strategic investor is a completely different story. Split threats will be a way for the regulator to force the national operator to let alternative operators use its infrastructure on favorable terms.

BRE Bank Securities

5 July 2007


Media Polsat strikes partnership deal with CNN Polsat is going to be CNN’s exclusive partner in Poland, with access to the CNN Newsource news service, the CNN archives, and live reports from all over the world. This is the next in a series of developments showing that Polsat is changing in a way that is a threat to TVN, and especially the TVN24 news channel. Polsat cuts prices According to M&MP, Polsat will slash ad prices by 40% in July and August. Summer price cuts usually hover around 20%. A 40% cut is a move to attract advertisers and maximize the season’s ad revenue. It surprised competition, including Polsat’s main rivals TVN and TVP, both of whom said that they do not intend to engage in a price-slashing battle with Polsat. Polast’s aggressive price policy, although applied in a period that is not significant from an earnings standpoint, exerts additional pressure on TVN’s market positioning. FOX instead of Puls? The National Broadcasting Council (KRRiT) has finished an inquiry into whether News Corp, owner of a 35% stake in TV Puls, is also the station’s controlling shareholder. The analyses indicated that News Corp did not take over control over the broadcaster together with the shareholding interests. TV Puls is going to launch a new programming lineup developed with the help of News Corp experts in the fall. The broadcaster also registered a domain called “Foxpolska.pl,” which probably means that it is going to change its name to “Fox Polska.” After weak ratings reported recently, this is another piece of bad news for TVN, confirming that it has to prepare to defend its turf in an increasingly competitive marketplace. Polsat gets stronger In a TV station ranking, Polsat had the first place in terms of advertising revenues in May, recording a 16.3% increase on May 2006 to PLN 235.6m, ahead of TVN whose revenues rose 3.5% to PLN 213.7m. Furthermore, after long negotiations, Prokom Investments reached an agreement with Polsat by which the latter will take over a 51% stake in the Warsaw-based radio station “Radio PIN.” Prokom will keep the remaining 49% of the shares. The revenues were considered net of discounts, hence, they are not an adequate representation of the situation in the advertising market. But if we look at the ratings of the different stations, we clearly see that Polsat is gaining ground while TVN is getting weaker.

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 133.7 1 147.7 1.2% 1 212.8 5.7% 1 267.0 4.5% Number of shares (m) 56.8EBITDA 116.5 152.4 30.8% 175.9 15.4% 189.2 7.6% MC (current price) 2 463.3EBITDA margin 10.3% 13.3% 14.5% 14.9% EV (current price) 2 164.3EBIT 39.6 78.7 98.8% 103.8 31.8% 118.4 14.1% Free float 37.0%Net profit 32.0 68.6 114.4% 89.4 30.4% 102.2 14.3%

P/E 74.6 34.8 26.7 23.3 Price change: 1 month -4.6%P/CE 21.9 16.8 14.8 13.8 Price change: 6 month 11.3%P/BV 2.0 2.2 2.1 2.1 Price change: 12 month 20.9%EV/EBITDA 17.9 14.7 12.6 11.6 Max (52 w eek) 49.5Dyield (%) 1.2 3.2 2.9 3.7 Min (52 w eek) 27.7

Agora (Accumulate)Current price: PLN 43.4 Target price: PLN 47.6

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Agora WIG

We advise investors to ACCUMULATE Agora’s shares on the current weakness (upgraded from Hold, with a reiterated target). May was a weak month for the newspaper industry, but Agora outperformed competition (broadsheets) with a 7% YTD increase in sales. As another upside factor, Agora’s partnership with ATM Grupa is a source of much-needed multimedia content for the gazeta.pl Web service. Newspaper sales in May Average daily sales of Gazeta Wyborcza (GW) amounted to 428,000 copies in May, 4.3% more than a year earlier. At the same time, sales of Dziennik hit a record low of 192.7 thousand copies (down 25.6% y/y). Sales of all other leading dailies also took a dive: Rzeczpospolita (-7.5%), Super Express (-6.4%), Fakt (-2.5%). While YTD average daily sales of GW are 7.3% higher than a year ago. Dziennik’s are 0.9% lower, and Rzeczpospolita’s fell 10.3%. As for regional newspaper sales, the Polskapresse group recorded a 7.4% in May, and Mecom posted a 6.2% loss. Agora to pay PLN 1.5 DPS Agora’s shareholders voted to pay PLN 82.4m as dividends to shareholders (PLN 1.5/share). This is excellent, if unexpected news for shareholders. To date, the management were talking about paying PLN 0.5 per share as dividends plus possibly conducting a share buyback. With the current prices, the dividends imply a gross yield of 2.8%. The dividends will be paid to shareholders of record as of July 16th, 2007. The payable date is September 5th. Website content development Agora is joining forces with Poland's leading television producer, ATM Grupa, to form a fifty-fifty subsidiary with a share capital of PLN 4 million set to produce and distribute streaming video content. The partnership with ATM Group is a smart move on Agora’s part which will give it access to multimedia content for its gazeta.pl Web portal. Agora is an attractive investment at the current price level.

BRE Bank Securities

5 July 2007


IT Sector Public sector spending is picking up, although not in a way that could give any major boost to IT company earnings. Recent technology contracts include a PLN 13m order from the Ministry of Labor and Social Policy, the first assignment under the "PESEL2" project (several million zlotys), and orders related to the implementation of an electronic communications system for public administration units (SEKAP) amounting to PLN 21m. June offered promises of more to come in terms of government purchases. The National Health Fund (NFZ) announced its technology resource utilization strategy which provides that the tender for the healthcare service system “RUM II” should be awarded in the third quarter of 2007 (it is estimated at PLN 400m). The Ministry of Education (MEN) made a short list of firms bidding to provide 5.9 thousand schools with computers (the estimated total is PLN 272m). KRUS, the social insurance fund for farmers, needs a new system which it estimates at PLN 100m. Parallel to those announcements came the information that sluggishness and red tape caused the ministries concerned to lose most of the EU technology development subsidies allocated for 2007. The PLN 70m originally distributed between the Economy Ministry, the Interior Ministry, and the Finance Ministry, had to be reallocated to another purpose. The long-awaited contracts from public sector units are a welcome improvement, however, we do not expect actual awards until after the summer holidays due to slow and complex subsidy appropriation processes. Interior Ministry appoints IT team Thre Interior Ministry appointed a team of people who will assess IT projects co-financed by the government. The team will be headed by deputy head of the ministry’s IT department Edward Seliga. Its tasks will include technology and financial reviews, and ranking of bids. Its first task is to compile a ranking of projects with evaluations and financing suggestions by the end of July. National Health und’s IT resource allocation strategy The National Health Fund (NFZ) adopted a new strategy for technology resource utilization in the years 2007 through 2010. The priority strategic projects include the RUM II system, a second-generation data warehouse, and a fraud detection system. The RUM II is expected to run from 4Q 2007 to 1Q 2008, and its value is estimated at PLN 400m. The data warehouse project will start in the second half of the year, and is expected to cost several dozen million. The fraud detection system is estimated at PLN 30-40m. First “PESEL2” contract awarded The contract, which covers system architecture consulting, technical support, and system management, was granted to a consortium led by Unizeto Technologies. It is estimated at several million zlotys. MEN shortlists suppliers The Ministry of Education (MEN) made a short list of bidders vying for contracts to provide 5.9 thousand schools with computers. The value of the tender is PLN 272m. The short list includes Comarch (in consortium with Ogólnopolska Fundacja Edukacji Komputerowej (OFEK), offering NTT hardware), Asseco Poland (in consortium with Incom, offering Incom hardware), ABG Ster-Projekt (in consortium with Integrit, offering Incom hardware), and Sygnity (Action hardware). New contract announcements The Social Insurance Fund for Farmers (KRUS) reported that it is starting work to develop and put in place a new system. The system currently in place was developed for PLN 77.8m by a consortium of ZETO Bydgoszcz and Unizeto Szczecin, the sole bidder at that time. The KRUS estimates the new system at EUR 27m (PLN 101.6m). The Polish Committee for Standardization (PKN) is also holding a PLN 8m contract tender for a system to manage expert access and communications, including an analysis of technology and functional needs, hardware delivery and installation, and software integration and configuration. IT firms can also look forward to a project by the European Agency for the Management of Operational Cooperation at the External Borders of the Member States of the European Union “Frontex.” The ca. PLN 7.6m order is for hardware and software. Quotations can be submitted through July 2007. PLN 70m less on IT projects Public administration lost PLN 70m in technology development subsidies. Due to major project delays, these funds were reallocated from the Ministry of the Economy, Ministry of the Interior, and Ministry of Finance toward other purposes. If the fulfillment of those new purposes is as

BRE Bank Securities

5 July 2007


“speedy” as was the case with the |old| projects, Poland will have to gove back the PLN 70m to the European Union. Flood of IT project subsidy requests The Interior Ministry has received subsidy requests for a total PLN 130m. The budgeted allowance for this year is PLN 30m (vs. PLN 28m in 2006). The ministry will examine the requests through July. Seeing the huge demand for IT financing, the government decided to increase next year’s subsidy budget to PLN 90m.

BRE Bank Securities

5 July 2007


Analyst: Piotr JanikLast Recommendation: 2007-01-08

(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 262.0 379.1 44.7% 404.9 6.8% 441.7 9.1% Number of shares (m) 64.4EBITDA 31.0 37.0 19.3% 43.6 17.7% 53.1 21.7% MC (current price) 545.8EBITDA margin 11.8% 9.8% 10.8% 12.0% EV (current price) 455.2EBIT 25.8 31.4 21.7% 37.2 18.6% 46.7 25.6% Free float 43.7%Net profit 25.1 27.4 9.3% 32.6 18.9% 40.9 25.6%


ABG Ster-Projekt (Hold)Current price: PLN 8.5 Target price: PLN 7.87

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ABG Ster-Projekt WIG

With all the formalities attended to, the ABG Ster-Projekt / SPIN merger is now a fact, and, after approval by the court, further operations will be conducted under the name of “ABG SPIN S.A.” The company won a EUR 3.6m contract from a NATO agency (for consulting services, valid through 2009). A consortium of SPIN and Kamsoft landed a PLN 15.4m systems maintenance deal from the National Health Fund (NFZ) – its only significant order in June. As we have said many times before, a revival in public sector spending will not start until the fall. Until then, there are no developments in sight that could impact ABG SPIN’s stock performance. We are reiterating a HOLD rating. ABG Ster-Projekt/ SPIN merger official In an assets-for-stock transaction ABG Ster-Projekt placed its shares to SPIN’s shareholders in exchange for SPIN’s entire assets. A court approved ABG Ster-Projekt’s equity raise by PLN 24.3m through an issue of 24.3 million “K” shares. The exchange ratio was 4.41 shares of ABG Ster-Projekt for 1 share of SPIN. The merged company will operate under the name of “ABG SPIN SA.” Contract from NATO agency ABG signed an agreement with the NATO Maintenance and Supply Agency for consulting services related to the NATO IP Crypto Equipment (NICE) environment. The contract is estimated at EUR $3.6m. It expired at the end of 2009. Contract from NFZ A consortium of SPIN and Kamsoft was awarded a PLN 15.4m system maintenance contract by the National Health Fund. The effective term expires at the end of the year.

* FY2006 earnings adjusted for real-estate sale (PLN 8m) and reversal of a tax allowance (PLN 6m), FY2007-FY2008 multiples estimated based on pro-forma financial statements of the merged Spin and ABG Ster-Projekt

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 501.2 1 227.6 144.9% 1 308.6 6.6% 1 393.4 6.5% Number of shares (m) 25.2EBITDA 64.2 168.0 161.6% 184.0 9.5% 193.2 5.0% MC (current price) 2 144.9EBITDA margin 12.8% 13.7% 14.1% 13.9% EV (current price) 2 064.8EBIT 50.2 139.0 177.1% 154.2 11.0% 163.7 6.1% Free float 65.7%Net profit 64.5 114.6 77.7% 127.8 11.6% 136.5 6.8%


Asseco Poland (Under Review)Current price: PLN 85.2 Target price: -

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Asseco Poland WIG

Asseco continued its M&A activity in CEE markets in June, with Asseco Slovakia signing an agreement to take over a controlling stake in another Czech firm. We like the company's determination to growth through acquisitions, and look forward to the upcoming market debuts of its two subsidiaries, Asseco Business Solutions and Asseco Systems. We like much less the rumors about an “internal consolidation” of the Prokom Group. A merger of Prokom, ABG SPIN, and Asseco Poland would be an expensive and time-consuming undertaking. Furthermore, for Asseco Poland, to be integrated with firms so dependent on government contracts is risky in that its earnings will suffer in case of delays in the implementation of Poland’s e-government plan. Internal consolidation of the Prokom group Prokom’s CEO and shareholder Ryszard Krauze has far-reaching plans to consolidate the activities of three companies forming the Prokom Software group: Prokom, Asseco Poland, and ABG SPIN. He stressed that no decisions have been made yet, and that the priority for the near future is to finish the integration of ABG Ster-Projekt with SPIN, and Asseco Poland with Softbank. Any further reorganization will take place in 12–18 months at the earliest. Internal reorganization The Asseco Poland group reported mergers between its member companies. All assets of the subsidiaries SAFO, Softlab Trade, Softlab, and WA-PRO were transferred to Asseco Business Solutions. In exchange, shareholders of these companies will receive shares of Asseco Business Solutions. In addition, The share capital of Softbank Serwis Sp. z o.o. was raised, and the company changed its name to Asseco Systems Sp. z o.o. (the capital was raised by PLN 0.5m to PLN 34.8m by issuing 1000 shares with a par value of PLN 500, paid for in kind with Asseco Poland S.A.’s Building Automation Department). Asseco Systems goes public Asseco Systems will offer PLN 60-70 million worth of its shares, of which PLN 50m will be allocated toward acquisitions of small implementation firms, and the balance will be used to expand Asseco Systems’ customer service center in Łódź. In FY2006, Asseco Systems generated PLN 166m in revenues, and showed a PLN 3m bottom line loss due to a badly negotiated contract for cabling for the “Złote Tarasy” shopping mall. This fiscal year, the management expect PLN 265m in revenues and PLN 16m in net profit. The targets for FY2008 are PLN 304m and PLN 18m respectively. Strategy for Asseco Business Solutions The market debut of Asseco Business Solutions (ABS) is scheduled for late Q3/early Q4. ABS hopes to raise ca. PLN 70m, which will be used to take over Polish ERP developers. ABS is a product of a merger between four companies” three ERP producers: Safo, Soft Lab, WA-PRO, and the e-learning provider Incenti. The four constituents generated a combined PLN 90m in revenues and PLN 10m in net profit in FY2006. The FY2007 targets for ABS are PLN 100m for the topline and PLN 12-13m for the bottom line. Czech acquisition Asseco Slovakia acquired a 55.43% stake in the Czech ‘BERIT.’ The value of the acquisition depending on BERIT’s net profit for the business years 2006/2007 and 2007/2008, falls in a range of PLN 10.8m to PLN 19.9m. BERIT develops GIS systems and provides distribution chain management systems to media companies, manufacturers, and local governments.

* FY2006 multiples based on earnings adjusted for Asseco Poland stock options (PLN 3.9m), divestment of Mediabank (PLN 4.1m), goodwill write-off on S2Koma (PLN 4.8m), and net profit of the “old” Asseco Poland accounted for by the equity method (PLN 12m), FY2007-FY2008 multiples estimated based on pro-forma consolidated financial statements of the “new” Asseco Poland, including subsidiary earnings consolidated on a pro-rata basis

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 455.0 579.0 27.3% 675.7 16.7% 753.5 11.5% Number of shares (m) 7.5EBITDA 57.6 76.5 32.9% 95.0 24.2% 110.0 15.7% MC (current price) 1 503.8EBITDA margin 12.7% 13.2% 14.1% 14.6% EV (current price) 1 474.7EBIT 45.5 63.7 40.0% 81.1 27.3% 95.7 18.0% Free float 56.9%Net profit 50.0 63.7 27.5% 81.7 28.2% 92.8 13.5%


ComArch (Reduce)Current price: PLN 200 Target price: PLN 185.8

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ComArch WIG

ComArch garnered two government contracts in June, and is working on a strategy aimed at increasing revenues from foreign projects (the contract with TeleYemen). As we have said many times before, a revival in public sector spending will not start until the fall. Until then, there are no developments in sight that could impact ComArch’s stock performance. Contract from Finance Ministry ComArch won a hardware and software contract from the Finance Ministry estimated at PLN 27.6m gross, with a three-month deadline. The contract also includes three-year maintenance of the central layer of the POLTAX system. Stage One of e-PUAP awarded to ComArch ComArch won a contract from the Interior Ministry for completion of the first stage of Poland’s Electronic Public Administration Platform (e-PUAP) for a gross PLN 13.77m. The deadline of the first stage is May 31st, 2008. Contract from Yemen ComArch won a contract from the Yemeni operator TeleYemen for the “Comarch BSS" billing platform module license and implementation. The contract value is $2.1m. TeleYemen is a telecommunications operator and provider of international call services and CDMA telephony.

* multiples estimated based on earnings adjusted for a deferred tax asset, gains from sale of Interia shares, and profits of subsidiaries accounted for by the equity method (Interia)

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Macrologic WIG




Macrologic (Buy)Current price: PLN 55 Target price: PLN 58.43

Macrologic completed a share buyback in June. After a weak first quarter (small growth relative to the FQ1 2006 earnings figures), followed by a persistent slump in contracts, Macrologic is still traded at a discount to its peers. We for our part see upside for the company, stemming from the fact that it operates in the fast-paced ERP market, and from future acquisitions. Share buyback Macrologic conducted a share buyback between June 12th and 22nd. The company bought back 21.7 thousand shares representing 0.54% of share capital and votes. The average buyback price was PLN 54.8/share.

BRE Bank Securities

5 July 2007





Prokom Software (Hold)Current price: PLN 163.5 Target price: PLN 150.3

Prokom’s CEO Ryszard Krauze announced plans to consolidate the activities of three member firms of the Prokom group: ABG SPIN, Prokom Software, and Asseco Poland. We still view Prokom Software as being strategically positioned to benefit from the long-awaited revival in public sector spending expected in the fall. Until these contracts start to flow, we are reiterating a HOLD rating on Prokom. Subsidiary consolidation Prokom’s CEO and shareholder Ryszard Krauze has far-reaching plans to consolidate the activities of three companies forming the Prokom Software group: Prokom, Asseco Poland, and ABG SPIN. He stressed that no decisions have been made yet, and that the priority for the near future is to finish the integration of ABG Ster-Projekt with SPIN, and Asseco Poland with Softbank. Any further reorganization will take place in 12–18 months at the earliest. Dividend decision Prokom’s shareholders voted to pay PLN 15m as dividends to shareholders (PLN 1.08/share). The date of record is July 20th, and the payable date is September 5th.

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Prokom Software WIG

* multiples estimated based subsidiary earnings consolidated on a pro-rata basis (Asseco Poland, ABG Ster-Projekt, Spin)

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 814.4 1 315.4 61.5% 1 394.2 6.0% 1 476.2 5.9% Number of shares (m) 6.9EBITDA 39.6 116.6 194.4% 145.9 25.1% 163.1 11.8% MC (current price) 613.8EBITDA margin 4.9% 8.9% 10.5% 11.0% EV (current price) 518.7EBIT 17.3 85.0 390.7% 113.6 33.6% 130.1 14.6% Free float 79.9%Net profit 2.8 65.2 2234.3% 88.7 36.1% 104.0 17.2%

P/E 254.3 14.5 10.6 9.1 Price change: 1 month 12.4%P/CE 28.3 9.7 7.8 6.9 Price change: 6 month -14.4%P/BV 2.2 1.3 1.2 1.0 Price change: 12 month -15.6%EV/EBITDA 18.9 8.3 6.2 5.3 Max (52 w eek) 123.5Dyield (%) 1.1 1.1 1.1 1.1 Min (52 w eek) 70.1

Sygnity (Under Review)Current price: PLN 89 Target price: -

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Sygnity WIG

June was a successful month for the Sygnity group, marked by contract awards from such major customers as the Labor Ministry, regional administration units (the SEKAP system), and BGŻ. In spite of these successes, the company warned that it would again show a bottom line loss for FQ2. Our earnings projections for Sygnity are under revision. Second quarter still in the red During a general meeting of shareholders in June, Sygnity’s management warned that the company would probably report a net loss for the second quarter, but that earnings would improve dramatically in the third and fourth quarters. Sygnity posted a net loss of PLN 17.4m for FQ12007 compared to a PLN 0.9m loss in FQ1 2006. After the merger with Emax, amortization of intangible assets depressed net profit by PLN 2.5m. Full-year amortization will bring Sygnity’s consolidated bottom line profit down by PLN 32.7m. Other reasons behind this weak performance according to the management is the hiatus in government spending on IT projects, and the costs incurred on the merger with Emax. PLN 27m worth of deals in two months Sygnity won two contracts from the Ministry of Labor and Social Policy. The first is for implementation of the “SI SYRIUSZ” system supporting customer service by labor services, monitoring of the Polish labor market, and supporting exchange of information between unemployment monitoring agencies. The “SI SYRIUSZ” project will also include modification of the “PULS” system currently operating at over 300 labor offices. Sygnity also reported that the ministry extended the term of the “SI POMOST” system maintenance agreement. The system was rolled out by Sygnity at 2 thousand ministerial offices across Poland. The “SI SYRIUSZ” contract has a deadline in June 2008. The “SI POMOST” expires at the end of 2007. The total value of the two contracts is over PLN 13m. A consortium of Sygnity’s subsidiary Aram and LTC, won a contract to implement the electronic communications system SEKAP for public administration units in the śląskie voivodship. The PLN 20.8m assignment includes a rollout of an electronic document interchange system at 54 offices (5.5 thousand users) and development of an e-public services platform and an electronic forms platform. Sygnity won a contract from BGŻ for implementation of the “Flexcube” system for managing securities deals and international payments. Its gross value is PLN 16.3m. Sygnity will also manage maintenance for the system for five years. A consortium of Sygnity’s subsidiary Winuel and R-Data won a PLN 4m contract to roll out an EDI system at 81 local government units in the małopolskie voivodship. Bond offering, dividends Sygnity conducted a PLN 35m offering (par value is PLN 10,000) of discount bonds with yields based on 6M WIBOR plus margin. The bonds will be redeemed at par on December 6th, 2007. Sygnity’s five-year debt offering plan is estimated at PLN 100m. After the June 6th offering, the value of outstanding bonds is PLN 85m. Dividends Sygnity will pay PLN 1 per share in dividends. The record date is July 4th, and the payable date is September 13th. Shares admitted for trading 2.8 million shares of Sygnity’s “X” stock with a par value of PLN 1 issued as merger consideration for Emax shareholders, were admitted to trading on the WSE, increasing the number of shares traded in a regulated market to 10.7 million.

**** FY2007-FY2008 multiples estimated based on pro-forma financial statements of the merged ComputerLand and Emax

BRE Bank Securities

5 July 2007





Techmex (Under Review)Current price: PLN 40.5 Target price: -

Sentiment to Techmex remained buoyant in June on reports about a new GIS tender and about Karen Notebook’s shares being transferred from trading on the OTC market “CeTO” to the Warsaw Stock Exchange. GIS contract opportunities will keep sentiment positive in the coming months. We are in the process of revising our earnings projections for Techmex. Contract from ARiMR The Agency for Agricultural Restructuring and Modernization (ARiMR) signed an agreement with an IT consortium including Techmex for an “on-site inspection” system for the mazowieckie, podlaskie, and pomorskie voivodships. The contract value is PLN 15.9m. Techmex is going to inspect some 9950 farms using the “FOTO” method based on satellite imaging. The deadline is September 30th, 2007. Techmex considers selling Karen Notebook shares Techmex is considering selling a portion of its shareholdings in Karen Notebook to financial investors. Techmex currently owns over 8.5 million KN shares (63.9% of share capital) acquired for PLN 0.3 apiece. In other news, Techmex is bidding for a GIS contract with an estimated value of PLN 25m, expected to be signed in the third quarter.

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Techmex WIG

* multiples estimated based on subsidiary Karen Notebook’s earnings consolidated on a pro-rata basis

BRE Bank Securities

5 July 2007





Kęty (Reduce)Current price: PLN 242 Target price: PLN 180.5

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Kęty WIG

We think that investors have too much faith in Kęty's’s second-quarter earnings performance. Driven by the current construction momentum, the company shows strong revenue growth (generated mainly on rising aluminum prices on the LME), but its EBIT is slower than expected, due to insufficient capacity and stale product margins. Note also that Kęty is much deeper in debt (PLN 300m) than its competition. A 100bp interest rate hike will bring the company’s pre-tax profit down by PLN 3m, offsetting the effects of the 6%-to-3% cut in the customs duties levied on aluminum. We are reiterating a REDUCE rating on Kęty. Weak Q2'07 results According to Kęty's estimates, the group will generate over PLN 315m in sales in the second quarter, marking a 24% increase on a year earlier. The Flexible Packaging Segment (FPS) is expected to increase revenues by 25% on FQ2’07, the Extruded Products Segment (EPS) will report a 16% improvement, and Aluminum Systems Segment (ASS) will grow sales by 18%. The consolidated operating profit is pegged at PLN 29-31m, and the bottom line will fall within a range of PLN 20-22m. Last year’s second-quarter EBIT was boosted by a PLN 19.7m (PLN 16m to net profit) compensation for fire damage. We are disappointed by these figures. Kęty’s revenues increase on higher aluminum prices, but this is not reflected in profits which remain slow despite a strong construction momentum because the company earns profit margins based on volumes, and its capacity is limited. First-half net profit is expected to reach PLN 43m, and EBIT will stand at PLN 57m. The full-year targets are PLN 98m and PLN 130m respectively, and we believe that the company will meet, but not exceed them (delivery so far is 43%). Our forecasts are 20% higher. Based on the management’s guidance, Kęty’s stock currently trades on a 2007 P/E of 20.7 - a level which we consider too high for a manufacturer with limited upside. Customs duties to give PLN 3m boost to profits A reduction in the customs duties on aluminum imported from non-EU countries from 6% to 3% is going to give a ca. PLN 3m boost to Kęty’s second-half operating profits. This news is in line with our expectations.

Metals

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 11 669.7 11 645.1 -0.2% 11 658.8 0.1% 9 583.7 -17.8% Number of shares (m) 200.0EBITDA 4 545.5 4 768.0 4.9% 5 080.7 6.6% 3 568.6 -29.8% MC (current price) 22 640.0EBITDA margin 39.0% 40.9% 43.6% 37.2% EV (current price) 24 055.0EBIT 4 201.2 4 387.7 4.4% 4 645.4 5.9% 3 078.3 -33.7% Free float 36.0%Net profit 3 395.1 3 970.9 17.0% 4 135.3 4.1% 2 935.2 -29.0%


KGHM (Accumulate)Current price: PLN 113.2 Target price: PLN 119

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KGHM WIG

We updated our valuation model for KGHM to account for the situation in the copper market, which prompted an upward revision to our average annual price assumptions from $6,243 to $7,164 per ton of copper in 2007, and from $5,300/t to $6,850/t in 2008. The result was an increase in the net profit forecasts, upped to PLN 4 billion in FY2007 and PLN 4.1bn in FY2008. We remain convinced that copper prices will hold at their current high levels going forward as global stockpiles remain low relative to demand. Assuming a capacity of ca. 900,000 tons in FY2007, the excess of supply over demand will be a mere 100,000 tons (0.5%). The copper stockpiles monitored by the three leading exchanges have shrunk by 20,000 tons. Over 60% of all LME deals are struck by investment funds, so, to a large extent, funds are the ones that determine the prices. In the second half of the year, copper will continue to trade high on market news, worker strikes at mines and copperworks, and cheap money. We recommend to accumulate KGHM. KGHM workers set to strike According to the leader of the biggest trade union organization, the strike ballot results are valid at over-50% attendance. 98% of the workers voted in favor of a strike. In turn, the management are saying that the turnout was only 42%, and the vote was therefore invalid (a 50% minimum turnout is required). A short strike (up to a week) should not affect KGHM’s earnings (reserves). No dividends next year? According to KGHM’s CEO, sources in the State Treasury have signaled that, if the company goes ahead with a restructuring of its investment program, its entire profit for FY2007 might be retained. KGHM will make a decision on an upward guidance revision in the second half of the year. A discussion about next year’s profit distribution is pointless in our view, not only with regard to investments, but also copper prices. If consensus turns out to be wrong and LME prices stay high, the State Treasury will expect dividends anyway. In our opinion, such statements are aimed at calming down KGHM’s trade unions. Good sales data reported by China should support copper quotes. KGHM explores deposits in Germany KGHM’s subsidiary KGHM Cuprum obtained a permit to explore copper ore deposits in Germany. The company will do exploratory drilling and geological tests on the as yet unexplored deposit. The copper beds are 500-1500 meters below the surface. KGHM is among the most experienced deep-seated explorers in the world. Test drilling, analyses, and the decision-making process, will probably take a few years. We welcome the fact that, like its competitors, KGHM is looking for new deposits. A reliable assessment of this particular investment will not be possible until we learn its terms.

BRE Bank Securities

5 July 2007


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Koelner WIG




Koelner (Sell)Current price: PLN 67 Target price: PLN 53.72

Our outlook on Koelner has not changed in the last month. There were no developments that would prompt a revision to our earnings forecasts for the company, and its stock still trades much over our target, that is why we are reiterating Koelner as a SELL. The management's next challenge is the incorporation of Śrubex, which is not going to be either easy or cheap at the current stock price level.

BRE Bank Securities

5 July 2007


Construction Construction slower in May Construction output in May increased by 16.3% versus May of 2006 compared to a 36.9% y/y increase in April. On a YTD basis, construction output was 40% higher than in May of last year. We were shocked by the steep deceleration in the pace of construction production. We reckon that it can partly be blamed on the “long weekend” that all Poles enjoyed in May, but it might also be a consequence of the industry’s growth barriers (labor, materials shortage). Our growth estimate for construction output for 2007 is 25% y/y which we still think is feasible despite last month’s setback. But the May data might cool investor sentiment to building stocks in the near term, possibly leading to a correction on the leading players (PBG, Polimex, Budimex, Mostostal Warszawa). Highest bid for PRK7: PLN 70m According to Parkiet, the highest bid to acquire the transportation engineering company PRK7 was made by Trakcja Polska which offered 70 million zlotys. Lower quotes were made by Mostostal Zabrze (PLN 65m), Spain’s Construcciones Rubau (PLN 58m), Strabag (PLN 52.5m), and Polimex (PLN 50.5m). Energomontaż Południe: Proposition to merge with Wica-Invest Energomontaż-Południe is set to take over with Wica-Invest,a developer established in 2000, currently building a commercial/residential complex in Wrocław. According to Energomontaż Południe’s management, an incorporation of Wica-Invest will be the best way of winding it up given that it is set to be discontinued by the end of 2007. In our view, Wica Invest could take over management of Energomontaż Południe’s real estate development business. Energomontaż Północ: Subsidiary’s EUR 2.3m contract Energomontaż Północ’s subsidiary Energomontaż-Północ-Gdynia signed a contract with Norway’s Vetco Abel for components for a floating tanker-loading platform. The EUR 2.3 million contract accounts for 3.7% of Instal Kraków’s consolidated FY2006 revenues. Instal Kraków: Another real estate project Instal Kraków is in the process of selecting a contractor for its next project, a residential complex in Krakow under the name of "Przewóz" consisting of four multi-family buildings with usable living space of ca. 15 thousand sqm situated on 2 hectares of land. The management are considering handling sales of the apartments themselves, but are not ruling out other solutions. “Przewóz” is another of Instal Kraków’s projects after the 20,000sqm “Śliczna” estate on which the company expects to net PLN 30m at the very least. We can safely assume that the new project will bring about roughly the same profit. Instal Kraków: Dividends set at PLN 0.1 per share Instal Kraków will pay out dividends of PLN 0.10 per share. Instal Kraków: A PLN 4.8m deal Instal Kraków signed a PLN 4.8m water treatment plant piping contract with the water management company “Górnośląskie Przedsiębiorstwo Wodociągów,” with a deadline in July 2008. The contract accounts for 2.6% of Instal Kraków’s consolidated FY2006 revenues. Mostostal Płock: Dividends set at PLN 0.75 per share Mostostalu Płock will pay out PLN 0.75 per share as dividends to shareholders. Mostostal Warszawa: PLN 11.2m contract Mostostal Warszawa’s 98.05% subsidiary Wrobis signed a general contracting agreement for repair/storage facilities for WPO ALBA of Wrocław with a value of PLN 11.2m (gross) and a deadline at the end of this year. Mostostal Warszawa: New business for PLN 36m Mostostal Warszawa’s subsidiary Wrobis signed a contract with Multilayer Pipe Company for a gross consideration of PLN 18m, with a deadline at the end of 2007. Furthermore, Mostostal Warszawa is going to broaden Gdynia’s “Janka Wiśniewskiego” street for PLN 18.2m (deadline is April 2008). Those are relatively small deals accounting for less than 3% of the company’s FY2006 revenues. We anticipate that Mostostal Warszawa will not be able to generate a profit margin this year due to the unprofitable contracts signed back in the first half of 2006, and soaring prices of building materials. Once those contracts are completed, profitability will return to the positive territory in 1-2 years.

BRE Bank Securities

5 July 2007


Mostostal Warszawa: Management reshuffling Shareholders of Mostostal Warszawa dismissed supervisory board member Ignacio Entrecanales Franco, replacing him with Millan Alvarez-Miranda. In a further reshuffle, the supervisory board elected a new management board consisting of Jarosław Popiołek, Andrzej Sitkiewicz, Jerzy Binkiewicz, Grzegorz Owczarski, Włodzimierz Woźniakowski, Miguel Vegas Solano, Jose Angel Andres, and Fernando Llorente Minguez. Mostostal Zabrze: Bechtel contract boosted by $8.5m Mostostal Zabrze-Holding signed an annex to its contract with Bechtel for expansion of aluminum works in Mosjoen, Norway, expanding the scope of work and increasing the price to a total $50m (PLN 143.7m). Back in April, the company reported that it expected the contract price to go up to $41.7m. Naftobudowa: PLN 6.8m contract Naftobudowa signed three contracts with Geldof Metaalconstructie for an aggregated price of EUR 1.8m (PLN 6.8m). Naftobudowa: Supervisory board appointment Naftobudowa’s shareholders appointed Mr. Tomasz Bukowski to the supervisory board (Mr. Buczkowski also serves on the supervisory board of Ropczyce, and has held executive positions at Impexmetal and Lotos Paliwa). PBG: HB9 takeover official PBG is the official owner of a 68.47% stake (68.46% votes) in Hydrobudowa 9 which it acquired to PLN 54.8m. PBG: Subsidiary’s EUR 13.6m contract A consortium of Korporacja Budowlana Doraco (leader), Infra Sp. z o. o. (PBG’s subsidiary), and Hydrobudowa Gdańsk, signed a contract for expansion of the “Gdańsk-Wschód” sewage treatment plant. The EUR 13.6 million contract has a deadline in January 2010. Infra’s stake was not disclosed. PBG: EUR 70m deal negotiations with Norwegians fail PBG failed to reach an agreement with Lyse Gass AS regarding LNG purchases, the consideration for construction of an LNG system in Risavika, and KRI’s LNG order. PBG estimated the potential contract at EUR 70m. The company claims that the fact that it did not get the contract will not impact its FY2007 earnings. PBG: Conditional contract for PLN 74m PBG signed a conditional contract with Resources Services Ltd (London) for an underground gas storage in Nowa Ruda and its connection to a gas grid. The contract value is PLN 73.8m. One of the conditions precedent is that Resources Services Ltd has to win the bid to acquire the assets of the “Nowa Ruda” mine from the Polish government. This is a mid-sized contract in PBG’s core business segment (gas storage), accounting for 6% of its FY2007 revenue target. Entry into force will be delayed due to the conditions precedent. Polnord: Prokom Investments to pay with Polnord shares for a Pol-Aqua stake Prokom Investments took over shares of Pol-Aqua in a number that will allow it to exceed 33% of voting rights, including future votes arising out of Pol-Aqua’s future stock offering, by selling 146,240 shares of Polnord, thus decreasing its ownership interests from 50.21% to 49.05%. Polnord: New subsidiaries Polnord set up new subsidiaries: “Polnord-Łódź II” for the purposes of a 29,000 sqm real estate project, “Polnord-Łodź III” for a 40,000 sqm usabel space project, and “Polnord Warszawa-Wilanów I” (ca. 33,000 sqm). Polnord-Łodź I (formerly “VGG Administrowanie Nieruchomościami”) is going to build a residential building with ca. 18,000 sqm of usable space. Prochem: Acquisition of a real estate developer Prochem’s subsidiary Irydion purchased a 50% stake in “Elmont Inwestycje sp. z o.o.” of Krakow for PLN 4m from its 50.6% subsidiary Elektromontaż Kraków. Elmont is a real estate developer. This is a step toward moving into real estate development, in line with the company’s growth agenda. Prochem: Dividends set at PLN 1 per share Prochem’s shareholders resolved to pay PLN 3.9m in dividends to shareholders, i.e. PLN 1 per share.

BRE Bank Securities

5 July 2007


Prochem: Divestment of BISE Prochem sold 750 000 shares of BISE to DnB NORD A/S. The book value of those shares was PLN 1.6m, and the selling price was PLN 4.1m. The sale had been announced earlier. Prochem will gross PLN 2.5m on the transaction. Projprzem: Funds increase shareholdings to 14.21% ING TFI increased shareholdings in Projprzem from 10.90% (8.55% of votes) to 14.21% (11.14% of votes).

BRE Bank Securities

5 July 2007


Analyst: Krzysztof RadojewskiLast Recommendation: 2007-05-29



Budimex (Hold)Current price: PLN 127 Target price: PLN 121.7

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Budimex WIG

Budimex’s second-quarter earnings are bound to suffer due to soaring prices of building materials and a general shortage of labor, further aggravated by the continuing dispute with PPL regarding the Okęcie airport terminal. In better news, the company seems to be opening up to investors: its shareholders appointed Igor Chalupec to the supervisory board. Financial investors are also increasing positions in Budimex, most probably in anticipation of the EURO 2012 football championship and hikes in the prices of construction services. In the short term, we predict a correction on the stock spurred by its weak FQ2 earnings results. We are reiterating a HOLD rating on Budimex. PLN 180.5m contract Budimex’s wholly-owned subsidiary Budimex Dromex signed an agreement with Budimex Nieruchomości Inwestycje (a 50% subsidiary) concerning the residential/commercial complex “Murano” in Warsaw. The contract value is PLN 180.5m. It has a deadline in July 2009. The “Murano” project spans over 53 thousand square meters of usable space. It accounts for 4.6% of our FY2007 revenue estimate for Budimex. Budimex lands PLN 178m-worth of deals Budimex’s wholly-owned subsidiary Budimex Dromex signed a contract with Sanitec Koło for expansion of the latter’s factory in Włocławek. The PLN 46.5m contract has a deadline in June 2008. In addition, a consortium of Budimex Dromex (90% stake) and Ferrovial Agroman signed a EUR 38m contract (PLN 146.1m, Budimex Dromex’s stake=PLN 131.5m) with PKP PLK for modernization of the “Gdynia Główna Osobowa” train station. The deadline is January 2010. The two deals account for 4.6% of our FY2007 consolidated revenue estimate for Budimex. We predict that Budimex is going to win more and more profitable contracts going forward, and improve the profitability of its construction business. Problems with Okęcie terminal A new terminal at the Okęcie airport is set to be completed in a few days. According to press reports, PLL, the project owner, will sue the contractor for delays, and might claims as much as 10% of the contract price as compensation, which is roughly $ 25m. First, we need to point out that Budimex has already incurred losses exceeding PLN 100m on the Okęcie project. That said, we think that PPL is not likely to get what it is claiming given that it is partly responsible for contract delays caused by modifications introduced in the course of fulfillment. But Budimex might have to recognize additional allowances against the potential charges, which will affect its Q2 earnings results. Igor Chalupec appointed to Supervisory Board Igor Chalupec was appointed to serve on Budimex’s supervisory board. Increase in interest over 10% BZ WBK AIB Asset Management increased its voting interests in Budimex from 9.92% to 10.02%, after increasing its equity interests in the company above 5% back in March.

BRE Bank Securities

5 July 2007





Elektrobudowa (Hold)Current price: PLN 295 Target price: PLN 221.5

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Elektrobudowa WIG

Elektrobudowa’s stock continues on an upward curve despite the lack of contract news in the past month. We see upside in the company’s earnings as it gradually replaces the low-margin contracts from manufacturers with business garnered from the energy industry, but these are long-term prospects. In the near term, seeing no price drivers for Elektrobudowa’s stock, we are reiterating it as a HOLD. PLN 9.5m contract Elektrobudowa received an order from SNC-Lavalin Polska for delivery and testing of electrical equipment for the main building of the “Pątnów II" power plant for a PLN 9.5m consideration. The contract runs through 2007. It accounts for 1.7% of our consolidated FY2007 revenue forecast for Elektrobudowa.


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 394.7 690.0 74.8% 787.7 14.2% 874.1 11.0% Number of shares (m) 12.6EBITDA 28.2 36.4 28.8% 42.7 17.5% 48.9 14.4% MC (current price) 1 087.4EBITDA margin 7.2% 5.3% 5.4% 5.6% EV (current price) 921.5EBIT 27.2 35.2 29.3% 41.5 17.9% 47.5 14.5% Free f loat 27.0%Net profit 21.3 28.0 31.4% 33.3 19.0% 38.6 15.8%

P/E 40.8 38.8 32.6 28.2 Price change: 1 monthP/CE 39.0 37.3 31.5 27.2 Price change: 6 monthP/BV 21.8 5.6 4.8 4.1 Price change: 12 monthEV/EBITDA 29.8 25.3 20.9 17.5 Max (52 w eek) 103.0Dyield (%) 0.1 0.0 0.0 0.0 Min (52 w eek) 85.0

Erbud (Accumulate)Current price: PLN 86.5 Target price: PLN 100

Erbud’s stock has declined since the date of the IPO, we are guessing because of the lack of promised takeovers. Since we see no other reasons for this weakness, we advise investor to use it to take positions in Erbud as a source of high future returns generated on acquisitions which are sure to take place sooner or later. We are upgrading Erbud to ACCUMULATE. PLN 5.6m contract Erbud signed a PLN 5.6m contract with Pazim Sp. z o.o. for redevelopment of a part of a commercial building. The deadline is October 2007. The contract accounts for just under 1% of our FY2007 revenue estimate for Erbud. FY2006 profit allocated to reserves In line with expectations, Erbud allocated its entire profit for FY2006 to reserves.

BRE Bank Securities

5 July 2007


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Hydrobudowa Śląsk WIG


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 129.4 205.0 58.4% 330.0 61.0% 462.0 40.0% Number of shares (m) 3.4EBITDA 10.6 13.3 25.0% 32.0 141.3% 49.6 55.1% MC (current price) 664.7EBITDA margin 8.2% 6.5% 9.7% 10.7% EV (current price) 682.8EBIT 8.4 11.5 36.4% 30.1 161.3% 47.4 57.8% Free float 37.0%Net profit 7.2 19.3 169.3% 17.1 -11.4% 32.7 91.5%

P/E 92.9 34.5 38.9 20.3 Price change: 1 month -10.2%P/CE 71.3 31.6 35.0 19.1 Price change: 6 month 71.7%P/BV 43.0 20.4 13.6 Price change: 12 month 218.5%EV/EBITDA 64.4 56.0 23.2 15.0 Max (52 w eek) 237.0Dyield (%) 0.0 0.0 0.0 2.5 Min (52 w eek) 62.0

Hydrobudowa Śląsk (Hold)Current price: PLN 197.5 Target price: PLN 209

Hydrobudowa Śląsk garnered close to EUR 24m of business in June. Furthermore, by selling redundant assets, namely its shareholdings in Mostostal Zabrze and certain pieces of real estate, the company is eyeing PLN 37m in extra cash. As part of the processes leading up to its merger with Hydrobudowa Włocławek, a new CEO was installed in the company. The merger will be the determining factor of Hydrobudowa Śląsk’s stock performance in the near term. Prospectus approval by the KNF is pending, and the deal should be sealed by the end of July. We see no other developments that could impact the stock in the short term, and are reiterating a HOLD rating on Hydrobudowa. EUR 11.8m deal A consortium of Hydrobudowa Śląsk and PBG won a contract from an association of towns and villages situated in the Wisłok river basin for sewage management works financed from EU’s cohesion fund grants.The contract value is EUR 11.8m (Hydrobudowa’s stake is EUR 10.6m). Sale of Mostostal Zabrze shares Hydrobudowa Śląsk divested 1,355,279 shares of Mostostal Zabrze Holding for an average PLN 12.96 a share. The gain is estimated at PLN 17.6m, with PLN 2.6m added to the second-quarter profit (the company revalued the Mostostal Zabrze stake at a price level of PLN 10.99). We anticipated that the shares would be sold for the end-of-Q1 price. New CEO The supervisory board appointed Tomasz Wołoch as the new CEO. According to press speculation, Mr. Woroch is also the frontrunner to take the CEO position at Hydrobudowa Polska. PLN 19.3m real estate sale Hydrobudowa Śląsk sold real estate with a book value of PLN 11.3m for PLN 19.3m to PBG DOM. Hydrobudowa’s gross gain on the deal is approximately PLN 8m. EUR 11.9m deal A consortium of Hydrobudowa Śląsk and Hydrobudowa Włocławek won a contract for water and sewage treatment upgrades from the municipality of Zabrze. Hydrobudowa Śląsk’s stake in the EUR 11.9m contract is EUR 11.3m. Sewage treatment upgrade contract pared down Hydrobudowa Śląsk signed an annex to its April 2003 contract with the City of Krakow for upgrades in the city’s “Płaszów II” swage treatment plant, extending the deadline until October 9th, 2007, and reducing Hydrobudowa’s consideration to EUR 35.4m due to exclusion of certain works. The contract was signed on terms that, in today's market, are unfavorable for Hydrobudowa. It brought a ca. PLN 10m loss in the second quarter. The paring down of the company’s contractual duties was probably aimed at reducing these losses. A year ago, Hydrobudowa signed a similar annex to the same contract, cutting its consideration from EUR 43m to EUR 36m.

BRE Bank Securities

5 July 2007





Polimex Mostostal (Accumulate)Current price: PLN 283 Target price: PLN 297.7

In line with its growth-through-acquisitions strategy, Polimex took over an engineering firm in June. The company is considering a 1-to-25 share split to increase the trading volumes on its stock. In the coming months, we expect Polimex to land contracts from Lotos and PKN Orlen, sure to give support to its stock performance. We are reiterating an ACCUMULATE rating on Polimex. 1:25 split proposal Polimex’s shareholders will vote on a 1-to-25 share split.

Acqusition Polimex-Mostostal paid PLN 3.5m for a 100% stake in “Energotechnika Projekt Sp. z o.o.,” a construction, zoning, and technology design company. Polimex-Mostostal wants to develop Energotechnika Projekt’s business. This acquisition is part of the company’s plans to expand its design capacity. PLN 280m Letter of Intent Polimex-Mostostal and Bridgestone Stargard Sp. z o.o. signed a letter of intent to build a tire factory in Stargard Szczeciński. The letter sets out specific conditions for the investment and obliges the parties to enter into a binding on July 31st, 2007 at the latest. The contract value is PLN 280.9m. The deadline is October 2008. This is a material contract which accounts for close to 8% of our FY2007 consolidated revenue estimate for Polimex.

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Polimex-Mostostal WIG

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 777.2 1 254.5 61.4% 1 127.3 -10.1% 1 078.0 -4.4% Number of shares (m) 17.4EBITDA 32.0 43.4 35.6% 64.6 48.8% 74.2 14.7% MC (current price) 252.3EBITDA margin 4.1% 3.5% 5.7% 6.9% EV (current price) 183.8EBIT 20.9 29.5 40.7% 52.4 77.8% 57.5 9.7% Free f loat 45.0%Net profit 12.8 19.9 55.8% 37.0 86.0% 41.8 12.9%


Rafako (Reduce)Current price: PLN 14.5 Target price: PLN 11.4

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Rafako WIG

There were no developments in June that would change our short-term outlook on Rafako. We expect no major improvement in profit margins this year as the prices of materials and labor continue to increase. We are reiterating Rafako as a REDUCE. PLN 85m deal Rafako signed a PLN 85m contract with Elektrociepłownia Kielce for a biomass-fired cogeneration unit. Rafako’s stake in the consideration is PLN 54.1m. The deadline is October 2008.




Ulma Construccion Polska (Hold)Current price: PLN 375 Target price: PLN 306.6

There were no developments in June that could change our outlook on Ulma. The company is negotiating purchase of land for future logistics centers, but the talks are taking longer than expected. The first stage of a project in Poznań is expected to be completed by the end of the year. We see no potential price drivers for Ulma’s stock until the second-quarter earnings release, and are reiterating it as a HOLD. Buying land for logistics centers Parkiet reports that Ulma is negotiating the purchase of two parcels of land for its distribution centers. The company already owns land in Poznań, and should finish the first stage of construction there by the end of the year. The other centers will be located in Warsaw and in southern Poland (between Krakow and Katowice). The CEO promised good FQ2 results. Ulma raised the cash necessary to build the centers through an SPO in April, which brought PLN 90m (PLN 60m earmarked for the centers, which are expected to improve asset turnover and utilization).

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Ulma Construcc ion Polska WIG

BRE Bank Securities

5 July 2007





Farmacol (Accumulate)Current price: PLN 55 Target price: PLN 62.9

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Farmacol WIG

Farmacol’s shareholders allocated the entire FY2006 earnings to reserves, making it the only pharmaceuticals distributor that will not pay out dividends this year. According to the company’s management, the cash can be used to finance acquisitions. We did not take dividend flows into account in our forecasts. We are retaining a positive investment rating on Farmacol seeing that the market has not yet started to discount the role of its real-estate development business. No dividends from Farmacol Farmacol’s shareholders decided to continue their no-dividends policy. Funds reduce positions below 5% PTE PZU reduced its holdings in Farmacol from 6.75% (5.03% of votes) to 5.55 % (4.13% of votes).

Pharmaceutical Manufacturers and Distributors


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 4 006.0 4 204.7 5.0% 4 412.2 4.9% 4 631.9 5.0% Number of shares (m) 12.2EBITDA 108.1 104.4 -3.4% 114.4 9.5% 123.4 7.9% MC (current price) 1 456.0EBITDA margin 2.7% 2.5% 2.6% 2.7% EV (current price) 1 725.7EBIT 87.0 84.3 -3.1% 95.4 13.1% 105.3 10.4% Free float 47.9%Net profit 62.5 70.3 12.5% 80.0 13.8% 88.8 11.0%


PGF (Reduce)Current price: PLN 119 Target price: PLN 98.4

June did not bring any developments that could impact PGF’s stock performance. According to press reports, the company is looking to take over Aptekarz for PLN 55m. Early this month, PGF also announced a considerable acquisition from the Retail industry: over 30 pharmacies bought for PLN 30m. These acquisitions are not factored in our forecasts, but we predict that they might add PLN 1m to the FY2008 bottom line profit. We are reiterating a REDUCE rating on PGF. Executives sell 130,000 shares PGF’s CEO sold 60,000 of the company’s shares for PLN 98.30 apiece (10,000 through a subsidiary), and other board members sold a combined 70,000 shares for the same price. The shares were probably vested in them under a management incentive scheme.

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PGF WIG

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 817.2 1 944.4 7.0% 2 041.6 5.0% 2 143.7 5.0% Number of shares (m) 6.9EBITDA 23.2 26.2 12.9% 27.1 3.5% 28.0 3.5% MC (current price) 188.4EBITDA margin 1.3% 1.3% 1.3% 1.3% EV (current price) 244.6EBIT 17.7 20.4 15.1% 21.4 5.0% 22.5 5.0% Free f loat 58.1%Net profit 11.9 13.8 15.8% 14.8 7.0% 15.9 7.5%


Prosper (Hold)Current price: PLN 27.3 Target price: PLN 27

There were no developments in June that could change our outlook on Prosper. We stand by our view that its value will grow with time, as the pharmaceuticals market continues to consolidate. But we expect no breakthroughs in the near future. We are reiterating a HOLD rating on Prosper. Fund exceeds 5% shareholding threshold Pioneer Pekao Investment Management increased its voting interests in Prosper from 4.77% to 5.03%. DPS PLN 0.55 Prosper will pay out PLN 0.55 per share as dividends. meaning a payout ratio of 37% (PLN 3.8m). The dividends are in line with earlier announcements. We did not take dividend flows into account in our forecasts.

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Prosper WIG


(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 700.9 2 720.9 60.0% 2 993.0 10.0% 3 172.6 6.0% Number of shares (m) 2.7EBITDA 18.4 33.8 83.5% 45.3 34.0% 51.5 13.5% MC (current price) 255.9EBITDA margin 1.1% 1.2% 1.5% 1.6% EV (current price) 324.3EBIT 13.7 25.1 83.1% 36.5 45.3% 42.4 16.4% Free f loat 49.0%Net profit 11.3 15.8 40.3% 26.1 64.7% 32.4 24.2%


Torfarm (Hold)Current price: PLN 94.7 Target price: PLN 95.3

Torfarm is focused on internal integration, expected to bring a big improvement in profitability in two years’ time. In the near term, we do not expect any developments that could support Torfram’s stock performance. We are reiterating a HOLD rating.

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Torfarm WIG

BRE Bank Securities

5 July 2007


Retail FMCG: Sejm curbs big-box store expansion Acting against the Senate’s standing and retailer demands, the Sejm voted in favor of restrictions on big-box retail stores. Retailers will have to obtain special permits from local governments to build stores occupying more than 400 square meters. In our view, and contrary to the views of the authors of these regulations, the new laws will not protect small local retailers against international corporations, and might even make matters worse for them. With the new rules in place, the majors will want to move into smaller supermarket formats, heating up competition in a segment where Polish retailers currently enjoy a strong positioning. The 400sqm threshold is very low, and will put most stores like “Stokrotka” and “Polomarket” in the big-box category, potentially slowing down their expansion. But there is a good chance that the new laws will be appealed against to the Constitutional Tribunal, and get a veto from the President.

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 4 064.2 4 590.2 12.9% 5 153.3 12.3% 5 732.1 11.2% Number of shares (m) * 13.3EBITDA 110.5 145.5 31.6% 182.1 25.2% 203.5 11.8% MC (current price) * 2 095.3EBITDA margin 2.7% 3.2% 3.5% 3.6% EV (current price) * 2 322.8EBIT 79.0 107.2 35.6% 135.3 26.3% 147.3 8.9% Free f loat 33.1%Net profit 57.1 78.4 37.3% 102.2 30.3% 113.2 10.8%


Emperia Holding (Reduce)Current price: PLN 157.9 Target price: PLN 134.17

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Emperia Holding WIG

Emperia currently trades far above our price target, probably driven by investor expectations concerning the upcoming acquisitions. The factors that will matter most from a valuation standpoint will be the prices and exclusions recorded in revenues after these acquisitions are integrated into the group. But we will not know these details until Emperia releases its prospectus in the fall. In other news, a new rival in market integration has emerged recently: Rabat Pomorze has an ambitious growth strategy and an acquisition plan similar to Emperia’s (payments in shares), and may interfere with Emperia’s purchases. We are reiterating a REDUCE rating on Emperia. Acquisition of Maro-Markety Emperia signed a Letter of Intent to acquire a 100% stake in Maro-Markety, an FMCG retailer running 18 stores. Its revenues in FQ1 2007 amounted to PLN 20m. The Maro-Market stores operate under the name of Lewiatan. Not knowing the acquisition price (payment will be made in cash and in shares), we are not able to estimate either the added value of this deal, or its impact on Emperia’s sales (we do not know whether Maro-Markety made purchases from BOS). In our view, the impact will be inconsiderable. GA postponement Due to formal errors, Emperia moved the date of its general assembly from June 15th to July 20th at the latest, without changing the agenda. Merger talks with Lewiatan According to reports, Emperia Holding is in talks to tighten its relations with Lewiatan, a chain of 1.9 thousand retail stores located all over Poland, with annual sales reaching PLN 3.5 billion. Such an incorporation would be an exciting move, although its attractiveness will depend on the price (or the share exchange ratio). When estimating its impact on Emperia’s value, one must take into account that most Lewiatan stores are franchises, meaning that their earnings would not be consolidated by Emperia, and, more often than not, they make their purchases from either BOS’s, or Eldorado’s wholesale stores. M&A activity continues Emperia signed conditional agreements to acquire 100% stakes in Sydo and Alpaga-Xema, FMCG wholesalers operating in the Wielkopolska and Dolny Śląsk regions. Both firms own cash&carry outlets, but also make direct deliveries. Their combined revenues for FY2006 amounted o PLN 300m. Again, we cannot assess the impact of those acquisitions on Emperia’s valuation because we do not know their prices (payments will be in cash and in shares). But we welcome the fact that Emperia makes a step forward to extending its coverage on new regions.

* incl. stock placement to BOS sharehodlers

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 3 683.3 4 011.4 8.9% 4 354.8 8.6% 4 563.8 4.8% Number of shares (m) 127.7EBITDA 89.8 108.4 20.7% 115.1 6.2% 120.5 4.7% MC (current price) 1 405.2EBITDA margin 2.4% 2.7% 2.6% 2.6% EV (current price) 1 406.6EBIT 58.2 76.8 31.9% 85.5 11.4% 92.5 8.2% Free f loat 34.8%Net profit 41.5 56.6 36.2% 65.1 15.0% 72.0 10.7%


Eurocash (Sell)Current price: PLN 11 Target price: PLN 7.38

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Eurocash WIG

Eurocash still trades well over our target price. Meanwhile, we still do not see any reasons to revise our earnings projections for the company, or raise our target price on its shares. All is quiet on the acquisitions front, which confirms our predictions that Eurocash might not be able to fulfill the expectations of the investors who are buying its stock at the current price level. We are reiterating a SELL rating on Eurocash. Dividends, incentive scheme Eurocash will pay PLN 29m (PLN 0.23/share) as dividends to shareholders, implying a DY of 2%. The record date is July 19th. The shareholders furthermore put in place incentive schemes for Eurocash’s employees and owners of Carment, which was taken over last year, who acquired a combined 2.5 million rights to purchase shares. The exercise price for Carment’s options (0.54 million shares) is PLN 6.51/share, while the employees (two tranches, each consisting of 1 million shares) will purchase shares for the weighted average price of Eurocash's stock as at November 2007 and 2008.

BRE Bank Securities

5 July 2007


Other Kopex: Prospectus approved, growth plans With its prospectus OK’d, Kopex has more aggressively set about to implementing a strategy aimed at building a large national machine group. Leszek Jedrzejewski, the main shareholder of Kopex’s majority owner ZZM, said in an interview that Kopex is about to strike a partnership with a Chinese firm to manufacture longwall systems for mines. It is apparently a large-scale initiative that will bring huge benefits (Kopex will establish a presence in the world’s largest mining market, expand its partner network, and gain more bargaining power for future contract bidding). In addition, Hansen Sicherheiststechnik, a company which Kopex targeted for acquisition some time ago, is reportedly considering a takeover of Becker SAIT, its main rival in mine electronics (with annual revenues of EUR 70m).

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 851.2 812.5 -4.5% 829.0 2.0% 845.8 2.0% Number of shares (m) 14.9EBITDA 180.4 178.8 -0.9% 184.5 3.2% 183.3 -0.6% MC (current price) 892.5EBITDA margin 21.2% 22.0% 22.3% 21.7% EV (current price) 1 244.8EBIT 86.2 88.0 2.0% 96.9 10.1% 98.8 2.0% Free floatNet profit 50.8 53.7 5.7% 62.1 15.7% 65.7 5.8%


Kogeneracja (Under Review)Current price: PLN 59.9 Target price: -

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Kogeneracja WIG

The Sejm passed a bill in May to eliminate the so-called Long-Term Contracts (LTC), as the next step toward liberalization of Poland’s energy market. The new laws give companies 150 days from entry into force to sign voluntary agreements terminating all LTCs. Stranded costs will be refunded by the government. Kogeneracja’s subsidiary, the Zielona Góra CHP, has a long-term contract in place, but, thanks to the refunds, its termination should not affect the parent’s earnings.

BRE Bank Securities

5 July 2007



(PLN m) 2006 2007F change 2008F change 2009F change Basic data (PLN m)Revenues 1 443.9 1 603.4 11.0% 1 673.1 4.3% 1 695.4 1.3% Number of shares (m) 50.0EBITDA 434.9 466.5 7.3% 480.9 3.1% 476.7 -0.9% MC (current price) 4 945.0EBITDA margin 30.1% 29.1% 28.7% 28.1% EV (current price) 4 944.7EBIT 326.4 368.9 13.0% 380.9 3.2% 366.6 -3.7% Free f loat 19.0%Net profit 270.0 303.3 12.3% 313.2 3.3% 301.4 -3.8%

P/E 18.3 16.3 15.8 16.4 Price change: 1 month 1.0%P/CE 13.1 12.3 12.0 12.0 Price change: 6 month -0.1%P/BV 5.0 4.8 4.5 4.3 Price change: 12 month 62.1%EV/EBITDA 11.4 10.6 10.3 10.4 Max (52 w eek) 113.0Dyield (%) 5.0 5.1 4.9 5.1 Min (52 w eek) 61.0

Mondi (Reduce)Current price: PLN 98.9 Target price: PLN 80

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Mondi WIG

US demand for packagings declined 3.3% in May. Supply and demand are still in balance, mainly thanks to growing exports to Europe (supported by a cheap dollar), where strong momentum helps the industry absorb any excess supplies. If we are right in our macro predictions (see the “Equity Market” chapter), the slowdown in US and Europe’s economies expected in the second half of the year will create an oversupply in Europe’s paper market, marking the start of a downward phase of the cycle. As for local market settings, Mondi is under pressure from growing wood prices. We are reiterating a REDUCE rating. Acquisitions: Stora Enso Poland MPP made an offer to purchase a minority stake in Stora Enso Poland from the State Treasury. If the offer is accepted, Mondi plans to start expanding and modernizing the plant still this year for some EUR 300m. The manufacturing mix of Stora’s Polish factory is similar to MPP’s, and includes: cellulose, industrial paper, cardboard and cardboard packaging, paper bags, as well as laminated cardboard packaging. The investments in the Polish factory should not affect MPP’s competitive position given that it exports close to 80% of its output. What we are concerned about is the growing local demand for wood (MPP also does not rule out a 60% capacity increase). The national forest administrator (PGL LP) is not able to satisfy demand even from furniture manufacturers and sawmills. Further price hikes are inevitable (+15% this year).

BRE Bank Securities

5 July 2007


Research Department: Michał Marczak tel. (+48 22) 697 47 38 Director [email protected] Strategy, telco, mining, metals, media Marta Jeżewska tel. (+48 22) 697 47 37 Deputy Director [email protected] Banks

Analysts: Krzysztof Radojewski tel. (+48 22) 697 47 01 [email protected] Pharmaceuticals, construction, utilities Kamil Kliszcz tel. (+48 22) 697 47 06 [email protected] Retail, materials, other Piotr Janik tel. (+48 22) 697 47 40, [email protected] IT, other

Kacper Żak tel. (+48 22) 697 47 41 [email protected] Real-estate developers, other

Jacek Borawski tel. (+48 22) 697 48 88 [email protected] Technical analysis

Sales and Trading:

Piotr Dudziński tel. (+48 22) 697 48 22 Director [email protected] Grzegorz Domagała tel. (+48 22) 697 48 03 Deputy Director [email protected] Marzena Łempicka-Wilim tel. (+48 22) 697 48 95 Deputy Director [email protected] Traders: Emil Onyszczuk tel. (+48 22) 697 49 63 [email protected] Grzegorz Stępien tel. (+48 22) 697 48 62 [email protected] Tomasz Dudź tel. (+48 22) 697 49 68 [email protected] Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/49 00-950 Warszawa www.dibre.com.pl

BRE Bank Securities

5 July 2007


Stock rating changes as of the date of this Release:

rating Accumulate

date issued 2007-05-09

price on rating date 43.01 WIG on rating date 60116.28

Hold

2007-06-06

45.30 64499.16

Hold

2007-04-04

46.86 56288.81

Accumulate

2007-01-08

36.40 50477.49

Hold

2006-12-05

36.00 51680.97

Agora

rating Accumulate



Sell

2007-06-06

130.00 64499.16

Hold Hold

2007-01-09 2007-02-20

83.60 98.00 50477.49 54712.06

Hold Hold

2006-11-07 2006-11-29

76.80 79.00 48767.01 49344.90

Handlowy

BZ WBK

rating Reduce



Hold

2007-04-26

22.58 59535.37

Hold

2007-05-29

21.05 62623.62

TP SA

rating Hold



Kredyt Bank cont.

rating Hold Accumulate Hold Accumulate

date issued 2007-01-09 2007-02-20 2007-04-05 2007-05-07

price on rating date 20.20 21.56 22.84 21.78 WIG on rating date 50477.49 54712.06 57981.75 59378.12

Accumulate Hold

2006-10-31 2006-12-11

16.80 22.50 47761.04 52166.51

Kredyt Bank

Erbud rating Hold



rating Reduce



Hold

2007-04-26

285.30 59535.37

Accumulate

2007-03-05

228.10 51917.31

Reduce

2007-02-05

266.50 55314.03

Accumulate

2007-01-09

225.00 50477.49

Hold

2006-11-29

208.50 49344.90

BZ WBK cont. rating Reduce



BRE Bank Securities

5 July 2007


rating Buy Accumulate Buy Buy

date issued 2006-10-30 2007-02-05 2007-03-07 2007-05-31

price on rating date 57.55 58.50 54.50 96.10 WIG on rating date 47761.04 55314.03 51482.87 62779.18

ZA Puławy

BRE Bank Securities

5 July 2007


List of abbreviations and ratios contained in the report. EV – net debt + market value (EV – economic value) EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation PBA – Profit on Banking Activity P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales Recommendations of BRE Bank Securities S.A. A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The present report was prepared with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. This document does not constitute an offer or invitation to subscribe for or purchase any financial instruments and neither this docu-ment nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. This document nor any copy hereof is not to be distributed directly or indirectly in the United States, Australia, Canada or Japan. Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation. Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible. BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any dam-ages incurred as a result of investment decisions taken on the basis of the present report. It is possible that BRE Bank Securities S.A. renders, will render or in the past has rendered services for companies and other enti-ties mentioned in the present report. BRE Bank Securities S.A., its shareholders and employees may hold long or short positions in the issuers’ shares or other financial instruments related to the issuers’ shares. BRE Bank Securities S.A., its affiliates and/or clients may conduct or may have con-ducted transactions for their own account or for account of another with respect to the financial instruments mentioned in this report or related investments before the recipient has received this report. Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of BRE Bank Securities S.A. Recommendations are addressed to all Clients of BRE Bank Securities S.A. The activity of BRE Bank Securities S.A. is subject to the supervision of the Polish Financial Supervision Commission. BRE Bank Securities S.A. serves as animator in relation to the shares of the following companies: Erbud, Es-System, Komputronik, Mieszko, Mondi, Opera za 3 Grosze FIZ, Pemug, Polimex-Mostostal Siedlce, Torfarm, Ulma Construccion Polska, Skarbiec Nieruchomości certificates. BRE Bank Securities S.A. receives remuneration from issuers for services rendered to the following companies: Agora, Bakalland, Elektrobudowa, Erbud, Kęty, Koelner, PGNiG, Polimex - Mostostal Siedlce, Polmos Lublin, Prokom Software, Provimi-Rolimpex, Sygnity, Techmex, Torfarm, Zelmer, ZA Puławy. In the last 12 months BRE Bank Securities S.A. has been an offering agent of the issuer’s shares in a public offering for the follow-ing companies: Energomontaż Północ, Erbud, Es-System, Fortis Bank Polska, Komputronik, Polimex-Mostostal, MNI, Torfarm, Ulma Construccion Polska. Asseco Poland provides information technology services to BRE Bank Securities. BRE Bank Securities is an offering agent for the shares of ATM . The information, including recommendations, contained in the Monthly Report has been published in separate reports, the publica-tion dates of which are located on page 4 of the Monthly Report. The list of recommendations that have been changed in the Monthy Report is located on page 5 of the present publication. The present report was not transferred to the issuer prior to its publication. Individuals who did not participate in the preparation of recommendations, but had or could have had access to recommendations prior to their publication, are employees of BRE Bank Securities S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendations. Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.

bre bank securities 5 july 2007 periodic report equity...

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