Slovenia: The next Cyprus or contrarian opportunity ?

I bet that many people could not point out on a map where Slovenia actually is located. Many people also don’t really know the difference to Slovakia.

So lets look at Wikipedia:

Slovenia is a small part of Ex-Yugoslavia. It has a population of around 2 mn and covers 20 thsd square kilometer. The history can be read extensively via Wikipedia. Most importantly, Slovenia was the first part of Yugoslavia which became independent. The next few years, Slovenia was seen as one of the big success stories in Europe, which resulted in Slovenia joining the EU and adopting the Euro already in 2007.

Last year however, Slovenia joined the European countries hit hard by the recession. The prior EUR fueled construction boom resulted in shaky loans, declining GDP, Rating agency downgrades, increase in interest rates etc. Starting last year, there was big fear that Slovenia was headed towards a “Greek style” restructuring.

Lately however, things look better. SLovenia has presented a restructuring plan which among others, includes the sale of a couple of state-owned companies. One should also note, that debt to GDP looks rather manageable:

On top of that, Slovenia’s economy is good at exports, but still, they are struggling in 2013. Nevertheless, Slovenia got 2 years “probation” in order to fix their problems, which they hopefully use.

The latest export vs. import data looks OK, nevertheless, 2013 will show a deficit of around -8% for the Government including bail out costs.

Slovenian stock market

From Bloomberg, one gets ~45 stocks from Slovenia with a market cap larger than 1 mn EUR, and 24 with a market cap bigger than 10 mn EUR. The major Slovenian stock market index only consist out of 7 stocks which are the following:

Ticker Name % Index Weight EV/EBITDA T12M P/B P/E
SBITOP Index          
KRKG SV Equity Krka dd Novo mesto 29.7 6.311327 1.32 10.39
PETG SV Equity Petrol DD Ljubljana 21.4 8.988676 0.98 8.35
TLSG SV Equity Telekom Slovenije DD 19.7 4.734508 0.89 16.89
MELR SV Equity Mercator Poslovni Sistem 13.5 N.A. 0.60 N.A.
ZVTG SV Equity Zavarovalnica Triglav DD 11.8 N.A. 0.76 5.96
GRVG SV Equity Gorenje dd 2.9 5.500231 0.18 15.94
KBMR SV Equity Nova Kreditna Banka Maribor dd 0.9 N.A. 0.08 N.A.

Quick check of the companies:

Krka

I have written about Krka already, a generic drug company similar to EGIS. I think this is a very interesting company,. Minimal home country exposure, consistently profitable. Not “extremely cheap” but good value for money. I would buy this company directly (if I could).

Petrol Ljublijana

This is the national refinery plus gas stations owner. Also active in Croatia and Bosnia. High “mean reversion” potential in my model.

Telekom Slovenije

Local telephone company. P/E 15 looks expensive, but company pays 15% dividend and has a 20% FCF yield. Significant debt reduction

Mercator

Supermarkets, Shopping centers. High debt load, large loss in 2012. However major shareholders sold out to Croatian company Agrokor in June.

Zavarovalnica Triglav

Major Slovenian insurance company, interesting, as valuation is really low for an insurer. 10.5% dividend yield. I would buy this stock if I could.

Gorenje

Household appliances. Has made losses but very cheap (P/B 0.2).

Nova Kreditna

One of the 3 problem banks, the only listed one. Most likely insolvent without Government support

The problem:

There is almost no way to directly buy Slovenian stocks. Only Krka and Nova Kreditna have secondary listings in Poland, but even there it is difficult to trade them. I asked several retail brokers in Germany and only SBroker (where I don’t have an account) told me I could trade the 2 stocks in Poland.

The alternative:

Although I usually do not like certificates issued by banks, in this case this would be the only alternative. I found several of them:

1. RCB7J9 / AT0000A038L9 from Raiffeisen International
2. AA0DMM / NL0000762557 from RBS
3. HV2AXY / DE000HV2AXY3 from Unicredit

The RBS paper seems to have the lowest bid/ask spread. As far as I have seen, they are all without maturity and track the SBI.

The opportunity /upside

For me the Slovenian index is quite interesting due to the following points:

+ there is almost no banking exposure left in the index. the only remaining financial is a cheap insurance company which i would buy outright
+ the Government has to sell some of their stakes, including among others the Telephone company. I am pretty sure that for the time being they will do nothing to punish the TelCo in order to get a price as high as possible
+ the largest stock in the index is Krka with ~30% which I want to buy anyway
+ once the Euro recovery story gets played more seriously (Goldman is already starting to “promote” European stocks), markets like Slovenia will follow with a certain delay.
+ Slovenia did never piss off other countries like Cyprus which supported tax dodging or Hungary which runs on a political amok course. In my opinion, they will be “well” treated by the ECB, EU and IMF.

Nevertheless for the time being I will not invest but look a little bit more into the other large index constituents, especially the TelCo and Oil company.

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