O2 Czech Republic Eyeing MSCI Index Return After 300% Rally

  • Ceska Sporitelna sees 60% odds O2 Czech will be added tonight
  • Company's free-float almost double that of Pegas Nonwovens

A potential boost to investor sentiment awaits O2 Czech Republic AS if MSCI Inc. announces as soon as tonight that it’s adding the phone and Internet company back into its global benchmark for the country.

Shareholders tracking the MSCI Czech Republic Index ditched the stock before a June 1 asset spinoff cut O2 Czech’s market capitalization and the value of traded shares, known as free-float, to levels that triggered its replacement in the gauge by textile manufacturer Pegas Nonwovens SA. But the former monopoly telecommunications company has surged more than 300 percent since its business revamp, lifting its free-float to almost double that of Pegas.

Erste Group Bank AG’s unit Ceska Sporitelna AS says that rally may have further to run as there’s a 55 percent likelihood MSCI will replace Pegas with O2 in tonight’s re-balancing of its benchmarks that will take effect on Dec. 1. There’s a 5 percent chance that O2 will be added while Pegas also stays, and a 40 percent probability that MSCI will delay changes to the Czech gauge, according to the bank.

“The most likely scenario is that O2 shares will return to the MSCI Czech Republic Index,” Martin Krajhanzl, a Ceska Sporitelna analyst in Prague, wrote in a report. “That would be a supportive factor for their growth.”

Share Surge

The stock fell 0.4 percent to 229 koruna on Thursday in Prague, paring its rally since the spinoff to 305 percent and valuing the company at 71 billion koruna ($2.8 billion). Pegas’s market capitalization is 7.1 billion koruna.

O2’s free-float is 46.8 million shares, or about 10.7 billion koruna, while for Pegas it’s 7.3 million shares, or 5.6 billion koruna, data compiled by Bloomberg show.

MSCI membership would create an additional “technical demand” for O2 Czech of about 2.3 billion koruna, an amount typically traded over about 60 trading days, according to Krajhanzl. The positive impact may be mitigated if some investors use the purchases by MSCI trackers to sell their holdings, he wrote.

Profit Outlook

O2 Czech, in which billionaire Petr Kellner’s PPF Group NV owns almost 85 percent, expects this year’s profit to rise from an 11-year low, helped by the spinoff of its network infrastructure that eased regulatory hurdles. The company last month announced a new policy to pay its full profit in dividends and said it would borrow money to finance a five-year share buyback program.

The dividend and share buyback plans prompted Komercni Banka AS today to recommend buying O2 Czech shares with a 12-month price projection of 251 koruna, according to a report from analyst Josef Nemy in Prague. Nemy didn’t comment on the prospect of MSCI membership in his note.

Milan Vanicek, an analyst at J&T Banka AS, said although O2 is now “probably” a better fit for the benchmark than Pegas, MSCI may want to avoid changing its composition too often and thus opt to postpone O2’s potential inclusion. Ceska Sporitelna’s Krajhanzl says this possibility “can’t be ruled out,” adding the index provider may also hesitate to add a stock that has recently experienced such steep price changes.

Pegas is the smallest of the three companies that constitute the MSCI Czech Republic Index. The other two are power utility CEZ AS and Komercni Banka AS, a unit of Societe Generale SA.

“The main argument” against inclusion “would be the stability of the index,” Krajhanzl wrote. “A delay in the inclusion of O2 Czech Republic’s shares could trigger a correction as some investors’ expectations would be disappointed.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE