Analysis: Poland's CEO carousel makes investors' heads spin

Polski Holding Nieruchomosci SA

25/06/2018 08:00

* CEOs changed at nine state controlled companies this year
    * Changes take shine off record-breaking Warsaw bourse
    * Government investments, politics play role
    * Polish stocks cheaper than peers https://reut.rs/2MQhNaL

    By Anna Koper
    WARSAW, June 25 (Reuters) - Poland's ruling party has set
off a new flurry of changes to the leadership of
state-controlled companies, putting investors off a stock
exchange that beat all emerging markets last year.
    The CEOs at nine companies have been changed this year,
hitting their share prices and adding to other factors driving
the Warsaw Stock Exchange WIG20  .WIG20  down 18 percent in
dollar terms after last year's 53 percent rise.
    Around 20 senior managers have also been shifted since
December, amid signs of infighting within the governing Law and
Justice (PiS) party.
    The absence from public life since April of its leader
Jaroslaw Kaczynski due to health problems has added to the
uncertainty. Kaczynski is Poland's political arbiter and author
of interventionist policies criticised by the European Union.
    The changes have taken place under Prime Minister Mateusz
Morawiecki, appointed by PiS in December to try to ease strains
with Brussels over the party's judicial reforms.
    Morawiecki's background running a bank owned by a foreign
firm made some investors think he would sympathise with their
position more than his PiS peers. Now they are not so sure.
    "Investors do not know what the strategy is," said Marcin
Szortyka, head of equities at NN Investment Partners TFI, one of
the top five investment funds in Poland, citing uncertainty over
potential banking sector mergers, the future of fuel companies
and whether a nuclear power plant would be built.
    Poland is the biggest beneficiary of EU funds and the EU has
threatened to cut funding in its next budget round unless
Morawiecki can convince them by late June that the government is
not threatening judicial independence.  urn:newsml:reuters.com:*:nL8N1TH3OS
    A separate EU plan to divert some funding from northern
European states such as Poland to southern ones tackling a
refugee crisis has further clouded the outlook.
    Against this challenging backdrop, some investors say the
corporate changes are a step too far. 
    "The market is already complicated enough without that,"
said Tim Love, investment director of emerging market equities
at global asset management company GAM. 
    "MORE IMPORTANT MATTERS"
    In Poland, the state is able to control listed companies
even where it does not hold a majority stake, giving it
potential sway over 23 stocks on the bourse, 12 of which make up
more than 70 percent of the blue chip index.
    Five of the latest CEO removals have been at blue chips and
there has been little explanation of the moves from either the
government or the firms themselves, raising questions over
policy and the future of other company chiefs.    
    PiS had already swept aside the vast majority of appointees
of the previous, centrist Civic Platform government at state
firms since its return to power in 2015 after an eight-year gap.
Personnel changes slowed last year but have now picked up again.
    The twists and turns in the share price of refinery PKN
Orlen  PKN.WA  illustrate the confusion this has caused.
    CEO Wojciech Jasinski lost his job in February, surprising
observers since he was known as an ally of Kaczynski.
    Two government sources said his refusal to fire colleagues
associated with Civic Platform had played a role, as had his
reluctance to join a project to build a nuclear power plant.
    "Sometimes, changes in managements of state-owned companies
are being made in the face of more important matters," said one
source, referring to government arguments the nuclear plant will
create jobs, reduce emissions and cut the risk of blackouts.
    The stock surged 24 percent in 2017 but lost 21 percent
after Jasinski's replacement with Daniel Obajtek, who increased
the amount of money invested in struggling coal miner PGG in his
previous job heading utility Energa  ENGP.WA .
    Earlier this month, PKN shares rebounded when the prime
minister took control of the refinery, and another, Lotos
 LTSP.WA , from the energy minister. One analyst suggested
costly involvement in the nuclear plant was now less likely and
a linkup with Lotos to create a strong European player would
accelerate.
    Since then, PKN's stock has dropped again with the revival
of uncertainty, and, with it, fears over future cash flow.
Neither the company nor the prime minister's office were
immediately available to comment on the changes in the board.
           
    MORAWIECKI
    As finance minister since 2016, Morawiecki has overseen
strong economic growth, 4.6 percent in 2017, and last year's
stellar rise in the Warsaw index, due in part because Poland did
not enact a plan to impose losses on banks over mortgages in
Swiss francs which hurt Poles when the zloty currency weakened.
    Another reason was a revival in coal prices, which relieved
pressure on utilities told to invest in Poland's ailing mines.
    Morawiecki has returned some banks to state control,
suggested private capital is too weak and cautious and said he
will prioritise domestic capital. Questions raised for investors
by these statements have been compounded by the CEO reshuffle.
    Production problems had already pressured copper miner KGHM
 KGH.WA  since the last quarter of 2017, but its shares have
dropped around 16 percent since Radoslaw Domagalski-Labedzki was
fired as CEO on March 10.
    It took over three months to find his replacement, leaving
potential sales of foreign assets uncertain in what an energy
ministry source said was a fight between various factions in
PiS.  urn:newsml:reuters.com:*:nL8N1MZ45W  urn:newsml:reuters.com:*:nW8N1T3003
    "There are three or maybe even four groups involved in
this," he said. The energy ministry did not immediately respond
to a request for comment.
    Sebastian Buczek, CEO of Quercus TFI investment fund said
the WSE's rise last year was fuelled by foreign investors who
had now moved on. "There are markets that are more interesting,"
he said, "where fewer unexpected things happen."
    
    SILVER LINING?
    Other shares that have fallen since their chief executives
left companies this year include Alior Bank  ALRR.WA , coal
miner Bogdanka  LWBP.WA , real estate company PHN  PHN.WA  and
construction company Polimex-Mostostal  PXMP.WA .
     Shareholders are already concerned by the government's use
of companies to fund favoured investments.
    "An individual investor does not necessarily invest in
Tauron  TPE.WA  or Enea  ENAE.WA  shares to take care of the
energy security of the country," Grzegorz Zielinski, Poland
director of the European Bank for Reconstruction and
Development, told Reuters, referring to the ulilities'
investments in coal mines.
    The CEO changes are far from the only factor that has
weighed against Polish shares and some see a silver lining in
the clouds over the Warsaw bourse.
    Swiss bank UBS predicts a revival later this year, citing
cheaper valuations, forecast GDP growth of 4.3 percent for 2018
and a budget deficit it expects to be just 0.6 percent of GDP.
    "A weak stock market is not a problem as such for Polish
macro," said Geoff Dennis, Head of Global Emerging Markets
Equity Strategy at UBS Securities, adding that there was little
risk to Warsaw's position in global equity market indices
although consumer spending or investment could suffer.
    Most emerging markets have declined this year, weighing on
Poland along with weakness in the zloty currency and diminishing
prospects for rate hikes that have pressured bank shares.
    The Warsaw Stock Exchange now has one of the lowest
valuations among markets included on the MSCI Emerging Markets
index  .MSCIEF , which rose from $1,160 at the end of December
to $1,280 in January before falling back to $1,090.
    The blue-chip WIG20 index has a price-to-earnings ratio
of 10.99 and the broader index is 11.15, putting it towards the
bottom of the index, just ahead of Hungary, Pakistan, United
Arab Emirates, Russia and Turkey.
 ($1 = 3.7292 zlotys)

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Warsaw blue-chips vs MSCI    https://reut.rs/2MQhNaL
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 (Additional reporting by Pawel Sobczak, Pawel Florkiewicz,
Wojciech Zurawski, Marc Jones, Agnieszka Barteczko; writing by
Michael Kahn; editing by Philippa Fletcher)
 ((michael.kahn@thomsonreuters.com; +420 224 190 443; Reuters
Messaging: michael.kahn.thomsonreuters.com@reuters.net))