More from
Fixed Income

Global IPO Rush Skips Czech Bourse as More Delistings Loom

Updated on

Global IPO Rush Skips Czech Bourse as More Delistings Loom

  • Prague trading volumes shrink 86% in decade as Warsaw grows
  • Unipetrol, Pegas and Fortuna may leave stock exchange in 2018

The Czech Republic may boast one of the fastest-growing economies in Europe, but its anemic stock market is missing out on a global recovery in share sales and trading, with more bad news around the corner.

More than 28 years after the end of communism, the Prague Stock Exchange is hardly a thriving place for companies to raise capital or for owners to cash out. While the PX Index rose 17 percent last year, turnover shrank 14 percent to the lowest in at least a decade and the bourse hosted no initial public offerings, even as global IPO volumes jumped 34 percent and trading rose in most markets. To make things worse, three of the Czech benchmark’s 13 companies are taking steps to delist.

Trading Slump

Czech stock turnover shrinks ninth year out of ten while most peers recover

Source: Bloomberg

Note: Volumes in local currencies, MSCI EM in USD

“The Czech transition to capitalism has been generally a success, but the stock exchange isn’t playing the key role it should, and its importance keeps declining,” said Jiri Kostka, an analyst at Komercni Banka AS in Prague. “It’s a vicious circle: limited local demand for equities is discouraging IPO activity, while the lack of a bigger, more liquid and more diversified market means Czechs generally don’t invest their savings in local stocks.”

While the Czech Republic isn’t alone with a thin equities market in the region, that performance contrasts with the safe haven status it has enjoyed among investors in other asset classes due to a robust economy and fiscally prudent governments. Since its inception in 1993, the stock market has been held back by laws complicating pension funds’ investment in stocks, limited IPOs of state companies and a series of delistings. In addition, low interest rates often make loans the preferred source of funding for businesses over selling shares.

The bourse also lacks variety, with four financial and two energy companies having a combined 84 percent weighting in the PX Index, and a complete absence of technology or pharmaceutical stocks. Now the majority owners of oil refiner Unipetrol AS, textile company Pegas Nonwovens SA and bookmaker Fortuna Entertainment Group SA are trying to buy out other stakes and may take the companies off the exchange, which now only has 23 listings.

The government could help revive trading volumes and IPO activity by promoting pension savings in stocks or providing tax breaks for listed companies, Prague bourse CEO Petr Koblic said in an interview with Lidove Noviny newspaper last month. He named the state-run international airport in Prague as a suitable IPO candidate.

Stricter European Union regulations have hurt trading in places like Prague that have a bigger proportion of small and less liquid stocks, which means that about 70 percent of all Czech share turnover now happens off the regulated market, he said.

The lackluster trading -- the volume with benchmark stocks has shrunk 86 percent over the past decade -- sharply contrasts with neighboring Poland. There, pension funds traditionally buy equities and previous governments floated stakes in the biggest state businesses, creating a vibrant platform for investors and private share issuers. The Warsaw Stock Exchange has 482 listings and the turnover on its WIG20 Index has jumped 36 percent since 2007.

Lost Decade

Prague trading shrinks 86% in 10 years as Warsaw turnover jumps 36%

Source: Bloomberg

Milan Vanicek, head of research at J&T Banka AS, said the Czech government could still float some businesses, but the amount of assets left in its ownership is limited. A boost for the exchange could come if lottery operator Sazka Group AS, which is considering an IPO in London, decided to cross-list its shares also in Prague, where it’s based, Vanicek said by phone.

The bourse already relies heavily on dual listings of foreign companies that have major operations in the Czech Republic. Erste Group Bank AG, Vienna Insurance Group AG, Stock Spirits Group Plc and Central European Media Enterprises Ltd. are primarily listed in other countries, but jointly account for 35 percent of the PX Index’s weighting.

The last Prague IPO was the sale of a $750 million majority stake in Moneta Money Bank AS by General Electric Co. in May 2016, the country’s biggest offering in eight years. Still, trading in benchmark stocks declined that year.

“The traditional preference among Czech companies for bank loans and their unwillingness to go public won’t go away,” said J&T’s Vanicek. “A real game-changer would be a pension reform that would boost demand for stocks, but I’m skeptical that this will happen any time soon.”

— With assistance by Konrad Krasuski, and Marton Eder

(Updates with bourse CEO comments starting in sixth paragraph.)