Polonaise on the Parkiet

Economists claim the stock exchange is a barometer in that the number of debuts are a measure of economic prospects. If true, then the present state of the Polish economy has been good for several years. The construction sector, which has only lately caught on, is rapidly making up for lost time – including in terms of stock exchange debuts

Institutional investors are cock-a-hoop for the fourth successive year after calculating their SE profits. For the fourth year running they are eagerly studying the prospects of companies planning to enter the Warsaw Stock Exchange, keeping their eyes open for firms promising large profits, even though companies which have disappointed investors after entering the SE are very few and far between. Investors looking for prime offers have much to choose from – in 2003 a mere 3 companies were accepted into the Exchange; a year later their number had multiplied tenfold. The next two years were similarly successful, with 35 debuting companies in 2005 and 38 in 2006. 2007 seems to be heading for another record, with the Stock Exchange authorities expecting as many as 70 debuts.

 The reasons are self-evident, what with the national economy continuing its rapid upward movement and expected to exceed 6 pct GNP annual growth. The Stock Exchange is also becoming an increasingly universal source of raising capital, with individual and institutional SE investors appreciating innovation and creativity in the search for new markets, and so being more inclined than banks to take risks in granting loans. The effects generated are that in March 2007, Warsaw Stock Exchange capitalization reached PLN 700 bln, the number of quoted companies approached 300 and the daily market turnover regularly exceeded PLN 1–2 bln.

Waiting for better times

 Analysts claimed the construction sector would enter a period of expansion after the boom began in 2003, which was also to be reflected by the improving health of the construction companies quoted on the Stock Exchange. The prospects of economic growth, improvement in living standards, greater access to home construction loans and Poland’s entry to the European Union were all to ensure success in this area of the national economy. Though company results did indeed improve gradually, the brilliant prospects that had been expected did not make themselves felt in the number of SE company debuts. Indeed, some even decided to leave the Exchange. There were many reasons for this: from bankruptcy – as in the case of Mostostal Gdańsk and Esbepepe, up to decisions taken by major investors – as in the case of Mitex.

Two construction companies appeared on the Stock Exchange in 2004 – GTC and PBG, both of which were excellent beneficiaries of Poland’s economic growth (in the case of GTC, also of the whole region), and due to this, were excellent investments. No construction company made an entrance in 2005, though WIG-Budownictwo had the best sector index. It was only late in 2006 that two debuts were registered on the Stock Exchange: Dom Development in October and Żurawie in December – a company renting construction cranes, which is not a member of the SE construction sector strictly speaking, but is closely related to it. Dom Development’s debut, however, was an event of much greater importance, not only due to the value of its share issue (PLN 420 mln compared with Żurawie’s PLN 26 mln), but also because Dom Development is a classic developer, in an area of the economy generating great excitement among investors over the past few months.  

Everyone wants to develop

 The demographic boom, rising personal incomes and greater access to mortgage loans all combined to create a mind-boggling rise in real estate prices in Poland. This was noted by stock exchange investors, who cast a greedy eye on companies which had something in common with developers. To give some idea of how such companies acted on the imagination of stock exchange players, let the huge 53.5 pct rise of Dom Development’s PLN 130.5 share price on the company’s SE debut prove the point, gaining a further

30 pct since October. But even that remarkable rise pales into insignificance when compared with the rises experienced by other companies, which decided to change their operational profile as Stock Exchange members. Faced with a momentary absence of developer debuts, several companies, including a number outside the construction industry proper, decided to focus on home sales. One such was the 7bulls.com internet company – the reference to the bull in its name being wholly justified since the company shares rose by more than 70 pct after its developments were announced in December 2006, and when its directors revealed plans to issue new shares. Yet another example is the Gant company, which owns a chain of money exchange offices and recently became an active developer in southern Poland. Gant’s share price rose by more than 500 pct in a mere six months. Construction firms also saw an opportunity for expanding their development operations. Projprzem has established a third line of operations to go with its steel structures and construction services, after moving into development. It is specifically in this area that the firm issued shares at the turn of 2006. Polnord, a Ryszard Krauze company which owns Prokom, is another example. Polnord bought up 49 pct of the shares of Fadesa Prokom from Prokom Investment, since Fadesa – according to analysts – has a very attractive order portfolio. Most of the shares are owned by Fadesa Immobiliaria of Spain.

Foreign operations

 A report by the Royal Institute of Chartered Surveyors suggests that the price of Polish real estate rose the fastest in Europe in 2006 – something that offers an additional incentive to European companies not only to set up operations in Poland, but also to debut on the Warsaw Stock Exchange and profit from the very rapid expansion of the capital market. Warimpex, a developer specializing in hotel construction, entered the Warsaw Stock Exchange in January. The company is already the owner or joint owner of 11 hotels and several shopping centres, as well as office space of around 40,000 sqm. The company operates in Poland, the Czech Republic and Hungary, and made its debut simultaneously on the Vienna Stock Exchange, selling existing and issuing new shares for a total amount exceeding EUR 100 mln. The company intends to develop 100 budget hotels in Central Europe using this money, with the total value of the investments to reach even as much as EUR 500 mln. Orco Property Group, a company also active in Central Europe and listed on the Prague Stock Exchange as well as Euronext, may join Warimpex on the WSE in the second quarter of 2007. The group is planning its debut in Warsaw and Budapest, which would highlight the important role these markets play in the company’s strategy. As in the case of Warimpex, the value of the offer may exceed EUR 100 mln. The group plans to purchase several plots in Warsaw and possibly on its periphery and also cannot exclude canvassing. In addition, the shares in a company from very far away may be issued on the Stock Exchange during this year’s holiday period: Australian Opal Property Developments, which intends to develop loft apartments in Łódź, as well as other projects.

Who’s next?

 The enviable prospects enjoyed by the construction industry, evidenced in the upsurge of more than 50 pct in construction and assembly performance of recent months, have led to a steady increase in the number of companies planning debuts this year. J.W. Construction, the Warsaw developer, recently submitted its flotation prospectus and is planning its share issue in the second quarter of 2007. This will be the company’s third attempt to enter the Stock Exchange, the first attempt proving unsuccessful due to adverse market conditions, while J.W. Construction’s second attempt in late 2006 by merging with Energopol Południe also ended in failure, which has led the largest developer in Poland to plan its debut by itself. The value of the offer will not be something to be sneezed at, even by Polish standards, as it is expected to amount to as much as PLN 600 mln. The industry, the company logo and J.W. Construction’s results have led analysts to forecast the success of this offer.

It seems sure that PA Nova, a smaller developer, will enter the Warsaw Stock Exchange, intending to raise around PLN 50 mln from selling its shares for investment in development sites, while Kopa House – a manufacturer of structures for constructing the frames of houses (offer value around PLN 30 mln) will also enter the SE. Erbud, Pol-Aqua and ABM Solid have all announced plans to debut on the Stock Exchange this year. Stolarka Wołomin and Dolcan – a developer – may also have (less concrete) flotation intentions in 2008.

The construction industry is sparing no effort to make up for lost time, as evidenced not only in the price of these companies’ shares, but also in the growing interest in such firms on the part of institutional and individual investors, as well as the number of debuts – of foreign as well as domestic companies.