9/26/2007

Poland, Russia Sales May Lift Sagging UniCredit, Italian Stocks

Italian banks and exporters are profiting from booming economies in eastern Europe. Their lagging shares won't catch up until investors notice the return from almost $10 billion of acquisitions in the past year alone.

``The growth is there,'' said Felix Schnella, who helps manage the equivalent of $600 million in European equities at Allianz Global Investors in Frankfurt. ``The question is how fast the market will realize this.''

Germany's DAX Index has risen 18 percent this year and the Dow Jones Euro Stoxx 600 Index is up 3.1 percent. Italy's benchmark S&P/MIB Index, the worst performer in Europe this year after Ireland's market, is down 3.5 percent.

Higher interest rates and contagion from the subprime- mortgage crisis in the U.S. hit the shares of Italian banks and insurers, which account for more than half of Milan's MIB Index.

At the same time, UniCredit SpA, Italy's largest bank, is merging its two Polish banks to create the No. 1 in the region. It now gets about 20 percent of its revenue from east European markets, twice the share of 1999. The three largest financial institutions in Italy have 40 million customers in the east.

Schnella bought Buzzi Unicem SpA in June. The Casale Monferrato, Italy-based cement company in January completed the acquisition of Germany's Dyckerhoff AG to tap demand for new buildings in countries including Russia and the Czech Republic.

Austrian and German companies began investing in former communist countries when the Berlin Wall came down in 1989. German businesses spent $13.3 billion in eastern Europe between 1990 and 2005 compared with $6.5 billion by their Italian peers, according to data compiled by Bloomberg.

Finding Growth

The Italians are now catching up. Italian companies announced $9.7 billion of acquisitions in the region in the past year, about the same as for Germany and France combined.

Italy's shipments to the 35 countries that make up Europe's emerging markets, including Russia, Poland and Turkey, have more than doubled in six years to $59.2 billion.

The exports accounted for more than 14 percent of total goods sent abroad last year, up from 9.7 percent in 2000, International Monetary Fund data show. The number of Italian companies with investments in eastern Europe jumped 18 percent to 3,011 in 2005 from 2,546 in 2001, says the Italian Institute for Foreign Trade.

``These are big numbers and they're surprising because people had been looking to other countries for eastern Europe exposure, like Austria and Germany,'' said Nikolaus Poehlmann, who manages the $190 million DWS Italian equities fund in Frankfurt.

New Consumers

Last month he added to his holdings in UniCredit. The bank has 24 million customers throughout eastern Europe. It spent $4.3 billion in June to buy banks in Kazakhstan and Ukraine.

Intesa Sanpaolo SpA, Italy's biggest bank by branches, has 7 million customers through 1,200 outlets across eastern Europe. Assicurazioni Generali SpA, the country's biggest insurer, has more than 10 percent of the life and non-life insurance markets in Hungary and Serbia as well as elsewhere in the region, for a total of 9 million customers.

Marazzi Group SpA, Europe's largest maker of ceramic tiles, and Indesit Co. SpA, its third-largest home-appliances maker, are among exporters that boosted profit by shifting production to lower-cost countries like Russia and Poland. They also lifted sales in those markets as local consumers became more affluent.

Profit Jump

East European economies will expand by 5.7 percent this year, more than twice the 2.6 percent expected rate for the 13 countries using the euro, according to IMF forecasts.

Indesit, based in Fabriano, Italy, gets about a third of its revenue from eastern Europe and has a 30 percent market share in Russia, according to UBS AG. The maker of washing machines and fridges reported a 48 percent jump in second-quarter profit.

The company is building a third plant in Lodz, central Poland, and expects to have 60 percent of production in low-cost countries by 2008. Its shares have gained 4.3 percent this year.

Marazzi's first-half pretax earnings climbed 12 percent, bolstered by a 35 percent jump in sales in Russia, where the company bought a rival in 2005 and built a plant near Moscow. Marazzi's shares have fallen 7 percent this year.

The potential growth is already factored into share prices of exporters, says Giulio Baresani Varini, who oversees the equivalent of about $613 million at Banca MB SpA in Milan.

Priced In?

Indesit trades at 13.5 times estimated earnings, while for Marazzi the multiple is 12.6. The S&P/MIB Index on average trades at 13.2 times future profit, the lowest ratio for two years.

``The emerging market boost has been largely priced in, especially for small-growth stocks,'' said Baresani Varini.

Baresani Varini holds UniCredit, which he says is ``cheap'' compared with future earnings potential.

UniCredit, whose shares have declined 9.6 percent this year, trades at 10.1 times estimated earnings versus a multiple of 11.6 for the MSCI World Bank Index.

The bank posted a record second-quarter profit, as operating income grew 17 percent in Poland and 20 percent in other east European countries, compared with a 4.2 percent growth for the bank's Italian, German and Austrian retail businesses.

UBS wrote in a note to clients in June that Italy was one of the ``better-placed economies'' to benefit from growing links to Europe's emerging markets.

Fabio Paolini, who manages about $4 billion in global stocks at Pictet Asset Management in London, bought more Marazzi shares last month as indexes tumbled. ``The market hasn't discounted the growth potential yet,'' he said.

Source:By Marco Bertacche, bloomberg.com



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