Government-Run Boards Make Polish Stocks Global Losers

  • CEOs tending to national interests is seen hurting dividends
  • Polish state-run corporations drag down Warsaw stock index

The Polish government’s growing role in the boardrooms of state-run companies is stoking the risk they’ll be saddled with costly projects and contributing to one of the worst stock-market performances globally.

The benchmark equity index has underperformed 92 percent of its peers worldwide in the past six months as Poland’s new government replaced managers of almost all major state-run companies following its election win in October. Power company Energa SA has led the slump and last month’s 6 percent drop for utilities is set to continue, according to Bank Zachodni WBK SA.

Bloomberg's market cap-weighted index of WIG30 state-run companies lags gauge of privately controlled peers.
Bloomberg's market cap-weighted index of WIG30 state-run companies lags gauge of privately controlled peers.

The Law & Justice party has spooked investors by triggering a European Union probe into its democratic record and a credit rating downgrade by Standard & Poor’s. Last month, the nation’s treasury minister suggested the CEOs of state corporations would be jettisoned if they didn’t follow the government’s economic policies.

“The government is using companies to fulfill its political goals,” Carsten Hesse, a London-based equity strategist at Berenberg Bank, who has an underweight recommendation for Polish stocks, said by e-mail on March 1. “Minority shareholders and dividends have to take a backseat -- that’s why I would be very careful investing into companies where the state is a shareholder.”

The government has already lowered the dividend expectations of investors as it seeks to gather financing for its $250 billion multi-year investment program, equivalent to almost half of Poland’s annual economic output. That opens the way for company cash to be spent on politically sensitive projects like bailing out the loss-making coal industry, building new power plants or consolidating state assets.

Energa, the country’s third-largest power company, has dropped 30 percent in the past six months, the biggest state-controlled decliner within the WIG30 Index. The stock has been battered by speculation dividend payments will be cut and the funds used for the government’s plan to build Ostroleka power plant. Other utilities, PGE SA, Tauron Polska Energia SA and Enea SA have followed its retreat. PGNiG SA, the country’s biggest gas company, tumbled the most in four months on Friday after its chief executive said he’s considering buying coal assets. The stock regained some losses on Monday.

Managers of state companies “can’t be calm” about keeping their jobs if they don’t put the interests of the country before those of the corporations they lead, Treasury Minister Dawid Jackiewicz said at a press conference on Feb. 26. Minority investors must be aware they are not investing in “typically commercial” ventures, but in companies with a “mission to strengthen” the national economy, Jackiewicz told the Rzeczpospolita newspaper three days later.

The same day the interview was published, the country’s deputy prime minister stressed that government is aware of minority shareholders’ rights. It’s unclear whether corporate governance standards have changed since the previous government, which also exerted influence over state-run companies, according to Robert Maj, an analyst at Haitong Bank SA in Warsaw.

“Investors already discount the risk of high capex at state-controlled companies, as managers have a history of deciding on key projects in agreement with the controlling shareholder,” May said last week. If the government amended laws to allow managers to knowingly enter into unprofitable investments “it would be a bad change,” he said.

Still, Bank Zachodni analyst Pawel Puchalski warned last week that Jackiewicz’s comments suggested “potential value-destructive deals sometime soon.”

“Not only might Polish utilities acquire new assets but, more importantly, management boards may soon no longer be expected to act in companies’ best interests,” he wrote in a note on Polish utilities on March 2.

The government plans to move its stakes in some of the biggest Warsaw-listed state-run companies, such as PKO Bank Polski SA, insurer PZU SA, copper producer KGHM Polska Miedz SA and chemicals maker Grupa Azoty SA, to a new holding structure by mid-2017, Jackiewicz said.

The apparent shift in stance on corporate governance is a red flag for investors, Krzysztof Kubiszewski, an analyst at Trigon Dom Maklerski SA in Warsaw, said last week.

“Had they said this during the IPOs nobody would have bought the shares.” 

The government, as well as state-controlled companies, were helped by almost constant economic growth during the last seven years as they raised cash on the Warsaw bourse, which now has a market cap of $129 billion.

“Politics can ruin or at least compromise a good fundamental story,” Alex Tedder, head of global equities at Schroder Investment Management Ltd, said in an interview in Warsaw on March 3. The political situation in Poland “appears unsettled. Till that’s resolved, you’ll find a lot of these companies trading at a discount.”

(Corrects name to Berenberg Bank from Berenberg Bank Schweiz AG in fourth paragraph.)
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