Equity 4 September 2013, 2:18pm

ANALYST VIEW - Hungary Richter among Top 10 favourite stocks at Erste

Portfolio

Erste has published its Equity Monthly for Central and Eastern Europe on Wednesday, including a top picks list, on which we find three Hungarian companies, drugs producer Richter, OTP Bank and Richter’s junior sector peer Egis. Richter is also among the Top10.

In a lengthy analysis Erste discusses many corporates and CEE countries, but we highlight only the Hungarian stocks this time.

The top CEE pharmas’ stock performances have been in positive territory since the beginning of the year, Erste noted, adding, however, that in their view the share prices of Krka, Richter and Egis continue to offer high and untapped potential.

“The Hungarian pharmas’ sound fundamental investment story is going to be further underpinned by the benefits from the persistently weak forint as well as the anticipated strong news flow this year. Preparations for the cariprazine product’s US market entry (Richter, in cooperation with Forest Laboratories, is awaiting the US FDA approval of the drug before the end of 2013) and the increasing likelihood of the stock’s return to the MSCI index bodes well for Richter’s share price in the coming period. The roll-out of the first biosimilar product (Egis, based on the cooperation contract with Celltrion), coupled with news on the mulled acquisition deal (most likely in Russia) and persistent attractive valuation gap, should work in favor of Egis’ share price appreciation," Erste said.

OTP

“In the case of OTP, we are close to losing our patience," Erste’s analysts said. They added, though, that at the current share price (at the July low of HUF 4,200), they see the worst-case scenario of the FX relief plan as priced in again (around HUF 450 per share).

“The recent weakness might be due to some negative surprise from the head of the banking association saying that the losses for the banks could be in the magnitude of hundreds of billions, suggesting some HUF 20-100bn total losses for OTP (considering its 20% market share) or some HUF 75-375 per share valuation impact. This can be seen as a bad start to the negotiations. Although a low-cost solution could exist, the probability seems a bit lower now. Moreover, the Russian operations are to be restructured, dragging profits down, due to elevated double-digit risk costs and shrinking revenues. With the insecurity on the FX relief plan fading during September, there is a chance that the OTP share might also be released," they added.

In the Top 10 list, Erste made three changes this time: The bank has excluded Kapsch due to a lack of short-term triggers, Migros due to its EUR short position and PKO. Instead it has included BIM (a safe recovery bet on Turkey) and Tofas due to its heavy correction. In case of Richter Gedeon Erste’s analysts see a good combination of fundamental attractiveness and MSCI inclusion fantasy.

Richter

Erste highlighted that Hungary’s leading drugs producer Richter is “the only CEE-based pharma company with a chance to bring (in cooperation with Forest Laboratories) an original drug to the market."

“R&D cooperation with Forest Laboratories is set to provide interesting news flow in the coming months, representing a catalyst for the company’s stock price as well as its valuation," it added.

Following its dropping out of the MSCI index in November last year, Richter’s share price tumbled and did not fully recover yet. Nonetheless, further bolstered by the recent stock split, liquidity revived considerably, with all of the recent stock performance data pointing to the greatly increasing likelihood of Richter’s return to the MSCI index from December 1, 2013, Erste’s analysts noted.

“Historically, the stock has been traded at a premium to its CEE-based pharma peers and rather demanding multiples. Given all of the above-mentioned factors, including the news flow related to the R&D foray, we believe that Richter’s premium to its regional peers (as well as Egis) is set to be preserved and that Richter has all prerequisites to remain one of the preferred investment opportunities in the Hungarian equity market for large institutional investors."

MSCI changes

MSCI has decided to remove the more stringent criteria for liquidity valid for MSCI Global Standard Indices and intends to apply the ATVR (Annualized Traded Value Ratio) to the MSCI Global Small Cap Indices. In Erste’s view, this will probably mean additions to the global standard indices in November at the SAIR (Semi-Annual Index Review). The announcement talks about six shares that may be affected. Richter is mentioned. In Erste’s calculations, Richter would have satisfied the present ATVR criteria in July and August and it seems that it will be able to fulfil them again in September. “Richter would thus most likely have returned to the country and MSCI indices without any change in ATVR requirements. On the other hand, this movement by MSCI means that the probability of Richter’s inclusion in MSCI indices from the beginning of December has increased to 100%," Erste said.

Erste has a HUF 4,526.5 target price for Richter, which is more than 20% below its current share price on the Budapest Stock Exchange (BSE) - a 23.7% upside potential.

Although Egis failed to make it to the Top 10, it remains on the list of top picks, with a HUF 25,700 TP by Erste, which marks a nearly 24% upside potential.

“The roll-out of the first biosimilar product (Egis, based on the cooperation contract with Celltrion), coupled with news on the mulled acquisition deal (most likely in Russia) and persistent attractive valuation gap, should work in favor of Egis’ share price appreciation."