Serbian equity: Does Serbia’s bull run still have legs?

IS IT THE triumph of hope over experience or a market rally based on strong underlying macroeconomic and microeconomic fundamentals? That was the debate raging in Belgrade in August as market practitioners took advantage of the holiday season lull in trading activity to take stock of whether the Serbian equity market would continue to be one of the world’s best-performing markets this year.

By the start of the third quarter the headline Belex-15 index was registering a 75% year-to-date return, with only China and Ukraine bettering Serbia’s market performance so far this year. Moreover, at the beginning of May the Belgrade bourse was up 85% and had captured the imagination of investors at home and abroad. But having slipped back from the record highs of May, the big question is whether the Serbian equity market can repeat the strong fourth-quarter performances of recent years and kick on in the final three months of 2007.

Certainly at the top tier of the market there are grounds for belief that the blue-chip stocks can continue to deliver positive returns for investors. Tigar, for example, which already has a strategic partnership with Michelin of France in tyre manufacturing, is developing a green technology project with UK private equity firm Greenhouse Investments. Tigar and Greenhouse plan to create a business that will recycle used tyres into granules that will be made into products for playing fields, sports equipment, children’s playgrounds and roads. Michael O’Leary-Collins, chief executive of Greenhouse Investments, says that on the back of a total €40 million finance package, Greenhouse will provide Tigar with the requisite financial advisory and business know-how to develop an export market for the finished product in the Balkans and then western Europe. "We hope to build a €60 million to €90 million business in the next two to three years, after which we will then sell it back to Tigar," says O’Leary-Collins.

Zoran Mitic, director of corporate finance boutique South East Europe Capital, says that there is growing private equity appetite for Serbian corporate assets. At the end of August, for example, Carlyle Group established a team to cover central and eastern Europe, including Serbia. Mitic says that interest is especially strong in the mid-market segment – in Serbia companies with an annual turnover of €10 million to €100 million. "There’s lots of hidden intrinsic value if a company is properly run and managed," says Mitic, adding that for many firms it makes more sense to sell a stake to a private equity investor than to jump through all the regulatory hoops necessary to complete an initial public offering. Although several Serbian firms have expressed a desire to list on London’s Alternative Investment Market, Mitic remains cynical about the prospects for such issuance. "It makes for good PR but whether they go ahead or not is open to question."

Serbia’s largest construction company, Energoprojekt, also had good news for the market over the summer, with the announcement that it is negotiating with Serbian Railways over a €170 million contract for the construction of Belgrade’s new railway terminal in Prokop. Given its strong relationships with such international companies as Bechtel and Strabag, the company is also poised to win increased business in booming markets such as Russia, where the authorities will soon be assigning $12 billion-worth of contracts associated with the hosting of the 2014 Winter Olympics in Sochi.

Value in niche players

Radu Sustar, director of AC Invest, the proprietary investment arm of Slovenia’s AutoCommerce Group, believes that there is also value in niche players such as Budocni Novi Sad, headquartered in the country’s northern Vojvodina province, which is benefiting from the construction boom in its home region. Sustar says that AC Invest tends to seek long-term value plays rather than short-term punts. "We look to buy 5% to 10% stakes and then stay invested for a number of years; we’re not day traders." Although average daily turnover more than doubled in the early part of the year to reach €8 million at times, Dusko Pavlovic, head of sales at Prospera Securities, says: "Serbia’s a buy-to-hold not a buy-to-speculate market as you don’t know whether you can buy and sell on the same day." With limited liquidity and no short selling or margin buying allowed, Pavlovic says that Serbia is a market that is free from hot money flows.

Despite valuations that are already heady, many bankers believe there is still upside in financial stocks. In a recent report, Banking in South Eastern Europe: moving into the spotlight, Deutsche Bank analyst Marion Mühlberger notes: "Solid economic growth, progress with macroeconomic stabilization, prospective EU membership and very low levels of financial intermediation underscore the great potential." At present, banking assets/GDP in Serbia are just 60%, way below the 90% level common in central and eastern Europe and a far cry from the 240% in the eurozone. Mühlberger forecasts that banking sector assets in Serbia will grow at an annual rate of about 13% until 2011, with total banking assets of just under €16 billion in 2006 set to reach roughly €29 billion in 2011. What’s more, at roughly 30% of GDP, loans to the private sector are still well below the 60% level that the country’s economic development could reasonably support, says Mühlberger.

High valuations

"You need to dig deep to discover the real value" Zoran Mitic, South East Europe Capital