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BRE Bank Securities

5 February 2007

Monthly Report BRE Bank Securities BRE Bank Securities

Periodic Report

Monthly Report February 2007

Equity market The macro-economic outlook for Poland is surprisingly positive. We do not see any threat of reversal in this uptrend in the next few months even given the inflated prices of Polish stocks. Company News Banks. The fourth-quarter earnings results will paint a rosy picture of the banking industry. High earnings expectations have been baked into the appreciating prices of bank stocks. That is why we are “retiring” our January ACCUMULATE ratings on Pekao, BPH, BZ WBK, and ING BSK. We will revise our forecasts after the fourth-quarter earnings reports. Telecommunications. TPSA’s stock price will probably be maintained at the current level by dividend payout and share buy-back. We recommend to use that strength to reduce holdings in TPSA before it starts to feel competi-tive pressure in Q1. Media. The excellent newspaper sales figures for December convinced us to stay bullish on Agora. Q4 results will probably confirm that the worst is already behind the company. IT. After a rally at the beginning of the year, most IT stocks have already exhausted their upside potential. We give REDUCE ratings on ComArch and Asseco Poland whose current prices more than price in the growth op-portunities that will present themselves in the years ahead. Smaller plays like Macrologic and Techmex still offer some upside. Metals We anticipate that the price of copper will stabilize at $5,000/T, and the downtrend will cease to impact KGHM. Now is a good time to take posi-tions in the stock. Construction. The fourth-quarter earnings of construction companies will disappoint despite favorable weather conditions due to growing costs. Moreover, given that market prices have exceeded our targets, we see a possibility of a correction in construction stocks in the coming month. Pharmaceuticals. According to IMS Health, drug sales in 2006 increased 4.2% relative to 2005. Based on this, we do not expect any surprises from the Q4 earnings results of pharmaceutical distributors, and predict that they will have a neutral impact on stock performance. Retail. Eurocash and Eldorado are set to release their Q4’06 earnings re-ports at the beginning of March. We expect good performance, especially from Eldorado. However, the current prices of both stocks already factor in the high expectations, and, since they have exceeded our price targets, we are downgrading our ratings on them. Ratings. We are downgrading our investment ratings for the following stocks at the time of this Monthly Report: BPH (Hold), Budimex (Reduce), BZ WBK (Reduce), ComArch (Reduce), ComputerLand (Hold), Eldorado (Reduce), Elektrobudowa (Hold), Eurocash (Sell), Hydrobudowa Śląsk (Reduce), ING BSK (Hold), Macrologic (Accumulate), Millennium (Reduce), Pekao (Hold), Polimex Mostostal (Reduce), Prokom Software (Hold), Tech-mex (Accumulate). We are suspending our rating on PGNiG.

BRE Bank Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

Analysts:

Marta Jeżewska (+48 22) 697 47 37 marta.jeż[email protected]

Michał Marczak (+48 22) 697 47 38 [email protected]

Andrzej Lis (+48 22) 697 47 42 [email protected]

Krzysztof Radojewski (+48 22) 697 47 01 [email protected]

Kamil Kliszcz (+48 22) 697 47 06 [email protected]

Macroeconomic Analyst Janusz Jankowiak

5 February 2007

WIG vs. indices in the region

BRE Bank Securities

Equity Market Macroeconomics

Avg daily trading volume (3M)

Average 2008 P/E

Average 2007 P/E

WIG 55 314 19.4

16.6

PLN 1462m

27000

32000

37000

42000

47000

52000

57000

06-01-30 06-05-28 06-09-23 07-01-19

pkt

WIG BUX PX50

BRE Bank Securities

5 February 2007 2

Monthly Report BRE Bank Securities

Table of Contents 1. Equity market ........................................................................................ 3 2. Fund flows ............................................................................................. 4 3. Current recommendations of BRE Bank Securities S.A. ....................... 6 4. Recommendation statistics ................................................................... 7 5. Macroeconomics ................................................................................... 8 6. Financial Sector ..................................................................................... 9

6.1. BPH ........................................................................................... 13 6.2. BZ WBK ..................................................................................... 15 6.3. Handlowy ................................................................................... 16 6.4. ING BSK .................................................................................... 17 6.5. Kredyt Bank ............................................................................... 18 6.6. Millennium ................................................................................. 19 6.7. Pekao SA .................................................................................. 21 6.8. PKO BP ..................................................................................... 22

7. Gas & Oil, Chemicals ............................................................................. 24 7.1. Lotos .......................................................................................... 25 7.2. PGNiG ....................................................................................... 26 7.3. PKN Orlen ................................................................................. 27 7.4. ZA Puławy ................................................................................. 29

8. Telecommunications .............................................................................. 31 8.1. Netia .......................................................................................... 32 8.2. TP SA ........................................................................................ 34 9. Media ..................................................................................................... 36 9.1. Agora ......................................................................................... 37 10. IT Sector ................................................................................................ 38 10.1. ABG Ster-Projekt ...................................................................... 39 10.2. Asseco Poland........................................................................... 40 10.3. ComArch ................................................................................... 41 10.4. Computerland ............................................................................ 42 10.5. Macrologic ................................................................................ 44 10.6. Prokom Software ...................................................................... 45 10.7. Techmex ................................................................................... 47 11. Metals ..................................................................................................... 48 11.1. Kęty ........................................................................................... 49 11.2. KGHM ........................................................................................ 50 12.3. Koelner ...................................................................................... 51 12. Construction ........................................................................................... 52 12.1. Budimex ..................................................................................... 55 12.2. Elektrobudowa ........................................................................... 56 12.3. Hydrobudowa Śląsk ................................................................... 57 12.4. Polimex Mostostal ...................................................................... 58 12.5. Rafako ....................................................................................... 59 13. Pharmaceutical Manufacturers and Distributors ..................................... 60 13.1. Farmacol .................................................................................... 61 13.2. PGF ........................................................................................... 61 13.3. Prosper ...................................................................................... 62 13.4. Torfarm ...................................................................................... 63 14. Retail\Wholesale ..................................................................................... 64 14.1. Eldorado .................................................................................... 65 14.2. Eurocash ................................................................................... 66 15. Others ..................................................................................................... 67 15.1. Kogeneracja .............................................................................. 67 15.2. Mondi ......................................................................................... 68 15.3. Provimi-Rolimpex ....................................................................... 69

BRE Bank Securities

5 February 2007 3


Equity market January was a successful month for the equity market, corroborating our predictions offered in our Strategy 2007 report (Jan. 9th). Poland’s good macro-economic indicators, paired with sustained bullish sentiment to European and U.S. equity markets, produced gains for most of the world’s stock indexes. We do not see any threat of reversal in that uptrend in the next few months, even though Polish stocks are expensive. In the near term, a buildup of IPOs (March) could challenge, or even cause a reversal. However, TFI and OFE flow data indicate that both investment fund companies, and pension funds, accumulated enough free cash to absorb the IPOs. For now, current trends in the US economy show that the slowdown is milder than ex-pected, and the FED has inflation under control. The interest rate hikes expected from the ECB in March are already priced in. From a European standpoint, the information to look for-ward to is the impact of the increase in German VAT rates on GDP growth in January. Prelimi-nary estimations indicate that the impact was less than expected, prompting analysts to raise their GDP projections. As a result, concerns about a slowdown in Polish exports to Germany have been mitigated. The macro-economic outlook for Poland is surprisingly positive. The warm winter will probably bring the GDP growth data for the first quarter above analysts’ consensus. GDP growth predic-tions by macroeconomists are increasingly hovering around 5.5%. Neither the December ’06, or the January ’07 inflation data are expected to prompt the Monetary Policy Council (RPP) to raise rates. The average CPI inflation should not exceed 1.7%, and is expected to hit 2.2% max during the year. After the summer season, CPI inflation should decrease to 1%. Some macroeconomists predict a cooling down of the economy in the second half of the year (YoY GDP growth at 3.5-4%) relative to the high reference-year figures, potentially hurting the equity market. But, in our opinion, investors will not discount such a scenario until they see clear signs of a slowdown. Macroeconomic indicators seem to be confirming the predictions offered in our Strategy 2007 report. As expected, the US economy will return on the 3% GDP growth path in the first quar-ter, likely accelerating demand for basic materials, mainly copper and crude oil. In case of the copper market, the crucial demand propeller will be a rebound in the housing market which, despite decent GDP growth, lost 20% of its value in Q4’06. The short-term implication of this slump is reduced demand for and increasing inventories of copper (inventories are piling up mostly in the US and Europe, while demand in Asia is picking up). In a longer term, growing prices of basic materials will propel inflation, potentially causing turmoil in stock markets in the second half of the year. While basic materials markets continue to show weakness, the sentiment is still bearish on telecoms (defensive sector) and financial stocks. This trend will probably continue until a clear uptrend takes shape on crude and metals. We expect the sentiment on construction stocks to dwindle in the near term. Major industry players like Polimex and Budimex will show disappointing Q4 results. As labor and subcon-tractor costs increase while high-margin contracts remain scarce, the prices of construction stocks, which already reflect very sanguine scenarios, are in for a pullback. For the months ahead, we predict that investors will turn their attention to tile manufacturers. In our opinion, the large overproduction and slower-than-expected growth in demand are already priced in. The construction boom observed in 2006 is yet to trigger increased demand for fin-ishing products. This will not solve all of the industry’s problems, but the situation will slowly get better. Stocks like Polkolorit or Nowa Gala seem to us an attractive investment for the months ahead. Construction and IT stocks were growth leaders again in January, with indexes up 22.8% and 16.2% respectively. Food stocks displayed the weakest performance, as did telecoms, with TPSA gaining the most and Netia taking the biggest plunge. The WIG 20 securities rose by an average 6%. During the same time, the MidWIG gained over 13%.

Changes in WSE indexes WIG WIG20 MIDWIG Banks Constr Media Food Tel IT YTD 41.2% 21.3% 56.3% 58.8% 157.7% 13.0% 38.8% 13.4% 46.1% QTD 13.4% 10.2% 17.4% 27.4% 39.4% 18.9% 3.7% 12.1% 31.1% MTD 8.3% 6.0% 13.5% 11.1% 22.8% 7.7% 0.9% 3.5% 16.2% Source: WSE

BRE Bank Securities

5 February 2007 4


Fund Flows TFI December 2006 marked another month of robust inflows into investment fund companies (PLN 2.8 billion). In December 2005, inflows were stronger (PLN 3.4 billion), but the YoY decline recorded this year can be explained with clients moving their fund share purchase decisions up to November 2006, which was a record month for inflows at a whopping PLN 3.7 billion. Combined, inflows for the two final months of the year amounted to PLN 6.5 billion (25% more than in the corresponding period a year earlier). December also put a stop to outflows from debt funds. There was a shift in equity investments away from equity funds and into balanced funds. If this trend continues in the next few months, it might be an indication of greater market volatility.

TFI inflows/outflows by “equity component” funds and money market/debt funds

-2 000

-1 000

0

1 000

2 000

3 000

4 000

5 000

2005-11-01 2006-02-01 2006-05-01 2006-08-01 2006-11-01

mln PLN

Akcyjne, stabilnego w zrostu, mieszaneDłużne, pieniężne, pozostałe

Source: Analizy Online

OFE Open pension funds (OFEs) received PLN 1.2 billion from Social Insurance contributions in December. The share of equity securities in OFE portfolios was 34.1% at the end of December 2006 versus an average 34.9% in November. Allocations to equities increased by PLN 407m (1%), while the WIG index edged up under 0.5%, and the WIG 20 rose 2.1%. The equity com-ponent of OFE portfolios decreased as more assets were reallocated to debt and other securi-ties. The equity component is still at a level which could bring about a correction, enabling funds to dilute the capital invested in the stock market.

Equities in OFE portfolios vs. WIG20

16 000

21 000

26 000

31 000

36 000

41 000

46 000

51 000

56 000

gru-04 cze-05 gru-05 cze-06 gru-0620%

22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

WIG Udział akcji w portfelach OFE

Source: BRE Bank Securities, Bankier.pl

PLN m

Equity, growth, balanced funds Debt, money-market, other

Equity component

Dec'04 Jun'05 Dec'05 Jun'06 Dec'06

BRE Bank Securities

5 February 2007 5


Emerging market funds Cash keeps flowing in to emerging market funds. Geographic allocations follow the same trends. Inflows are the largest for global market funds and funds dedicated to the Chinese market. Funds dedicated to Europe, the Middle East, and Africa (EMEA) recorded sustained outflow trends in January: they have lost close to US $300m since the beginning of the year, although they won back some $60m over the past two weeks. The sustained trends confirm that investor sentiment to emerging market funds is still bearish.

Weekly inflows/outflows for selected emerging market funds

GEM

-1 500

-1 000

-500

0

500

1 000

1 500

4-01

4-02

4-03

4-04

4-05

4-06

4-07

4-08

4-09

4-10

4-11

4-12

4-01

mln USD EMEA

-2 000

-1 500

-1 000

-500

0

500

1 000

4-01

4-02

4-03

4-04

4-05

4-06

4-07

4-08

4-09

4-10

4-11

4-12

4-01

mln USD

Source: EmergingPortfolio.com

$ millions $ millions

BRE Bank Securities

5 February 2007 6


Current recommendations of BRE Bank Securities S.A.

Stock Rating Target Price Issued

ABG STER-PROJEKT Hold 7.87 2007-01-08 AGORA Accumulate 41.60 2007-01-08 ASSECO POLAND Reduce 49.14 2007-01-09 BPH Hold 1022.00 2007-02-05 BUDIMEX Reduce 83.70 2007-02-05 BZWBK Reduce 233.66 2007-02-05 COMARCH Reduce 185.80 2007-02-05 COMPUTERLAND Hold 114.80 2007-02-05 ELDORADO Reduce 83.78 2007-02-05 ELEKTROBUDOWA Hold 124.60 2007-02-05 EUROCASH Sell 7.38 2007-02-05 FARMACOL Accumulate 45.60 2006-11-07 HANDLOWY Hold 91.50 2007-01-09 HYDROBUDOWA ŚLĄSK Reduce 115.00 2007-02-05 ING BSK Hold 857.22 2007-02-05 KĘTY Hold 180.50 2006-09-27 KGHM Accumulate 97.00 2007-01-09 KOELNER Hold 53.72 2007-01-29 KOGENERACJA Hold 61.80 2006-11-07 KREDYT BANK Hold 21.66 2007-01-09 LOTOS Accumulate 59.30 2006-08-24 MACROLOGIC Accumulate 51.81 2007-02-05 MILLENNIUM Reduce 9.89 2007-02-05 MONDI Reduce 80.00 2006-12-05 NETIA Sell 3.80 2006-09-06 PEKAO Hold 237.56 2007-02-05 PGF Under revision 2006-12-05 PGNiG Suspended 2007-02-05 PKN ORLEN Buy 66.00 2006-08-24 PKO BP Reduce 41.62 2007-01-09 POLIMEX MOSTOSTAL Reduce 154.50 2007-02-05 PROKOM SOFTWARE Hold 150.30 2007-02-05 PROSPER Accumulate 20.90 2006-11-07 PROVIMI-ROLIMPEX Hold 21.81 2006-12-05 RAFAKO Reduce 34.00 2007-01-09 TECHMEX Accumulate 27.96 2007-02-05 TELEKOMUNIKACJA POLSKA Reduce 20.60 2006-10-27 TORFARM Hold 63.7 2006-08-25 ZA PUŁAWY Accumulate 64.76 2007-02-05

BRE Bank Securities

5 February 2007 7


Recommendations issued in the last month

Recommendation Statistics

All For issuers to which BRE Bank Securities S.A. has rendered services

Statistics Sell Reduce Hold Accumula-te Buy Sell Reduce Hold Accumulate Buy

number 2 12 14 8 1 0 0 5 3 0

percent 5.4% 32.4% 37.8% 21.6% 2.7% 0.0% 0.0% 62.5% 37.5% 0.0%

Recommendation changes: Monthly Report

Stock Rating Previous Target Price Issued

ABG STER-PROJEKT Hold Under revision 7.87 2007-01-08 AGORA Accumulate Hold 41.60 2007-01-08 ASSECO POLAND Reduce Hold 49.14 2007-01-09 BPH Accumulate Suspended 1022.00 2007-01-09 BUDIMEX Hold Reduce 83.70 2007-01-09 BZWBK Accumulate Hold 233.66 2007-01-09 COMARCH Hold Reduce 185.80 2007-01-09 ELEKTROBUDOWA Accumulate Under revision 124.60 2007-01-09 EUROCASH Hold Reduce 7.38 2007-01-09 HANDLOWY Hold Hold 91.50 2007-01-09 HYDROBUDOWA ŚLĄSK Hold Suspended 115.00 2007-01-09 ING BSK Accumulate Accumulate 857.22 2007-01-09 KGHM Accumulate Hold 97.00 2007-01-09 KOELNER Hold Hold 53.72 2007-01-29 KREDYT BANK Hold Hold 21.66 2007-01-09 MILLENNIUM Hold Hold 9.89 2007-01-29 PEKAO Accumulate Suspended 237.56 2007-01-09 PKO BP Reduce Reduce 41.62 2007-01-09 POLIMEX MOSTOSTAL Hold Hold 154.50 2007-01-09

PROKOM SOFTWARE Accumulate Accumulate 150.30 2007-01-09 RAFAKO Reduce Sell 34.00 2007-01-09 TECHMEX Buy Accumulate 27.96 2007-01-09 ZA PUŁAWY Accumulate Buy 64.76 2007-02-05

Stock Rating Previous Target Price Issued

BPH Hold Accumulate 1022.00 2007-02-05 BUDIMEX Reduce Hold 83.70 2007-02-05 BZWBK Reduce Accumulate 233.66 2007-02-05 COMARCH Reduce Hold 185.80 2007-02-05 COMPUTERLAND Hold Accumulate 114.80 2007-02-05 ELDORADO Reduce Hold 83.78 2007-02-05 ELEKTROBUDOWA Hold Accumulate 124.60 2007-02-05 EUROCASH Sell Hold 7.38 2007-02-05 HYDROBUDOWA ŚLĄSK Reduce Hold 115.00 2007-02-05 ING BSK Hold Accumulate 857.22 2007-02-05 MACROLOGIC Accumulate Buy 51.81 2007-02-05 MILLENNIUM Reduce Hold 9.89 2007-02-05 PEKAO Hold Accumulate 237.56 2007-02-05 PGNiG Suspended Hold 2007-02-05 POLIMEX MOSTOSTAL Reduce Hold 154.50 2007-02-05 PROKOM SOFTWARE Hold Accumulate 150.30 2007-02-05 TECHMEX Accumulate Buy 27.96 2007-02-05

BRE Bank Securities

5 February 2007 8


The zloty appreciated by over 1% against most major currencies in the second decade of January, on a combination of global and local factors. An appreciation trend manifested itself in the entire emerging markets segment following a steep fall in the prices of basic materials including crude oil. Locally, the zloty was driven by the December/January inflation surprise (according to official GUS estimates, the inflation rate was 1.38% at the end of 2006, and the max forecast for January is 1.6%), last year’s lower-than-expected budget deficit, effective absorption of EU funds at the end of 2006, and Fitch’s rating upgrade for Poland. The zloty should continue on its strengthening course in the first half of 2007. EU fund inflows in the first quarter of the year are estimated at PLN 5-6 billion. The zloty/euro exchange rate will stay within the range of 3.70-3.90 until mid year, and the zloty/dollar rate will remain below 3. A reversal might occur in the second half of the year, as EU fund inflows slow down, the economy cools, inflation goes slowly up, and the political/fiscal risk increases on approaching 2008 budget planning. The short end of the yield curve will be sustained at least until April/May on continuing expec-tations of interest rate hikes in Poland among some market stakeholders. Those expectations will disappear in the second half of the year as the current CPI falls to ca. 1%, and there is deflation in producer prices. It will be similar with expectations of interest rate hikes by the ECB in the euro zone, where, after the CPI falls to 1% in August and the growth rate slows down below potential, the refi rate will stop at 3.75%. As expectations grow that the FED will ease monetary policy in the USA, the short end of the yield curve in Poland seems to offer a considerable potential. The long end will be influenced by contrasting factors: on the one hand, the prevalent moderate mid-term inflation rate fore-casts will support prices; on the other hand, market rates will be affected by slower growth, increasing fiscal risk, anticipation of a steep surge in public debt service costs (PLN 5-6 billion in 2008-2010 relative to 2007), and uncertainty about convergence to the euro. Hence, while we expect the yield curve to be flat in the first half of the year, afterwards, it is probably going to steepen, with 10Y bond yields at 5.2% max. The past year was a favorable one for the state budget. Strong economic momentum drove revenues over PLN 2.5 billion above target. This was close to PLN 1.5bn more than forecasted in mid-2006. At the same time, the government’s firm grip on spending kept all through the year helped generate almost PLN 2.7 billion in savings. Last year’s deficit of PLN 25 billion (below target) could have been ca. PLN 2.5 billion lower if it had not been for the “permanent appropriations” moved forward to this year. Even as it was, the deficit better than the target PLN 30.5bn, and 0.5% of GDP below analysts’ expectations, at 2.5-2.6% of the GDP. Calculated using the EU approach which will start to apply in Poland as of March, the public sector deficit was 4.6-4.7% of the GDP. This is an alarming outcome. Despite near-6% eco-nomic growth, our public finance is still heavily unbalanced. Despite favorable stock market trends, privatization revenues did not even reach one-third of the (very humble) target. Hence, despite lower deficit, financing had to be larger that expected. Poland's enormous borrowing needs did not allow for a reversal in the uptrend in public debt which exceeded 48% of the GDP.

Macroeconomics

BRE Bank Securities

5 February 2007 9


Financial Sector Annual re-ranking of the WIG 20 index It seems like BRE will stay within the WIG 20 Index. Getin Holding was ranked higher, but BRE is still eligible to be included in the top 15 securities, and will therefore be retained in the index during the annual review. The re-ranking will not have any impact on the two stocks. BRE will be retained in the top-20 of WSE-listed securities, and Getin has been attracting large investor interest for some time. Getin will have another chance to make it into the WIG 20 after the BPH spin-off. The fight will be between Getin, Bank Handlowy, and Millennium. It is hard to tell which bank has the best chance of winning a place in the WIG-20 given that we do not know their future trading volumes or quotes. Intercharge dispute After five years of considerations, the Polish competition watchdog UOKiK wants to impose up to PLN 160m fines on the largest banks for “colluding” to charge overblown intercharge fees. UOKiK’s ruling has an “executable immediately” clause. The affected banks first appealed against the clause, and then against the ruling itself. Of the 19 banks fined, the following were hit hardest: PKO BP and Pekao (PLN 16.6m each), BPH (PLN 14.7m), ING BSK (PLN 14.1m), BZ WBK (PLN 14.1m), Millennium (PLN 12.2m), Kredyt Bank (PLN 12.1m), Bank Handlowy (PLN 10.2m), BRE (PLN 7.7m), and Getin Bank (PLN 4.8m). But this is not the end: once UOKiK’s ruling is validated, retail chains might sue the banks for the fees they charged earlier, possibly leading to the banks’ being forced to pay out compensa-tions in addition to reducing the intercharge fees. But the banks are not going to stand still. They claim that the intercharge fees are adequate to offset the maintenance costs of payment processing systems, and that the ruling will hamper further development of the payment processing network. Retailers, in turn, say that the inflated fees limit their capacity to handle payments. The dispute is not over yet. Some banks have rec-ognized provisions against the fine amounts, which might be shown in their Q4'06 financials. The fines themselves are not a big imposition on income; what is worse is the loss of inter-charge income and the possible future claims by retailers. In the worst-case scenario, banks will be able to offset the loss of income against account management or card fees. But the conse-quences are hard to assess at this stage. If the worst-case scenario pans out, the banks most hurt will be those with the broadest exposure to the retail banking market and those that issued the largest number of cards. 2007 another good year According to the Inspector General for Banking Supervision, bank profits in FY2007 might gain a further 15%–20%. Last year's aggregate net profit stood at PLN 10.7 billion. Banks are pre-pared to generate income growth, and will continue to improve efficiency. We agree. We predict a FY09/06 CAGR of 14%. Income will be driven by increasing volumes paired with a slowdown in costs. Even if some banks are going to incur expenses on enlarging their sales networks, economies of scale and new sales channels will more than offset the growing costs. Pengab down to 38pts The index gauging sentiment in the banking industry fell 1.5pts within a month. Bankers are becoming more and more critical about the market situation, and their projections for the future are becoming less and less optimistic. We stand by our belief that there is nothing wrong going on in the banking industry; historically, the Pengab index is still soaring. Also, it usually backs off in January as the market regains its balance after the Christmas season. Lending on an uptrend Loan sales in 2006 exceeded PLN 70bn, marking a 23.4% increase from the previous year. Financial intermediaries generated PLN 11 billion of that amount, which was a whopping 78.9% more than in 2005 (a little over PLN 6 billion). Leading the market is Expander (PLN 3.3bn), followed by Open Finance (PLN 2.9bn), Żagiel (PLN 1.95bn), and intermediaries with sales be-low PLN 1 billion: Notus, Dom Finansowy QS, Fiolet, PDK, Goldenegg, A-Z Finanse. Financial intermediaries will play an increasingly important role as financing providers. They can focus their sales efforts on a single product group, e.g. mortgage loans, and offer clients a range of solutions from different banks. Clients appreciate the wide choice of products and the possibility to handle all formalities at one place, with the help of a dedicated account manager. Another advantage of financial intermediaries are competitive prices, often more attractive than offered by banks, achieved through negotiations. Banks are more than willing to reduce their margins when an agent offers to sell its millions of zlotys-worth of its products. This is good news for Getin Holding (three of its subsidiaries: Open Finance, Fiolet, and PDK were included in the

BRE Bank Securities

5 February 2007 10


ranking), and Kredyt Bank (Żagiel). Note that Żagiel is the undisputed leader in selling cash loans (the value of an average cash loan is much lower than an average mortgage loan). Record sales of mortgage loans According to data compiled by Rzeczpospolita, banks sold PLN 43.4bn-worth of mortgage loans (vs. PLN 24.3bn in 2005). The Polish Banks’ Association (ZBP) arrived at a similar figure (PLN 41bn). PKO BP is still the leader in mortgage loans, with sales at PLN 10.1bn. Millennium came in second (PLN 4.7bn) after BPH decided to discontinue selling foreign-currency mortgage loans. BPH was third even in spite of its diminishing market share (PLN 4.5bn). Lower in the ranking are GE Money (PLN 3.4bn), Pekao (PLN 2.7bn), mBank (PLN 2.3bn). Everybody knew that 2006 would be a record year for mortgage loan sales, and predictions hovered around PLN 40m. Also the record sales generated by ranking leaders came as no surprise. In our opinion, the market has already discounted the impressive performance in the mortgage loan market in 2006. ZBP: mortgage loan portfolio to reach PLN 350-400 billion by the end of 2015 According to the Polish Banks’ Association (ZBP), the value of mortgage loans might reach PLN 350-400 billion in 2015. 2007 sales are forecasted at PLN 55 billion versus over PLN 41 billion in 2006. The ZBP forecast covers retail clients and real-estate developers. At the end of 2006, ca. 40% of home loans were written in zlotys versus 20% at the beginning of the year. No new consumer lending regulations are expected to be introduced in the next few months (FCY lend-ing restrictions). Summing up, the ZBP expects that sales will surge ca. 34% YoY in 2007 (this applies to volumes, which include refinancing). Like in 2006, the increase in the net mortgage loan portfolios of banks across the board will be lower than sales volumes due to old debt re-payments and refinancing. If the mortgage loan portfolio is to increase from PLN 90bn to PLN 350-400bn at the end of 2015, the ‘15/06 CAGR would be 16% - 18%. This is in line with our expectations. At the end of November 2006, the YoY increase in home loans was over 50%. This means that the growth rate figures will decrease, but it will be an effect of the growing YoY comparable base, not of nominally weaker volumes. Good times are ahead of the Polish bank-ing industry, but this scenario is inline with our outlook, and has been already largely discounted by the market. Home loan subsidies In January, PKO BP pioneered sales of home loans with government-subsidized interest pay-ments based on an agreement with Bank Gospodarstwa Krajowego. The subsidies are an effect of the new law providing for governmental support for families who want to buy homes. Eligible loans are for 50 sqm of apartment space (the apartments themselves cannot be more than 75 sqm), and 70 sqm of house space (for houses up to 140 sqm). The subsidies are granted only to families and single parents who are not home owners. Pekao is also going to sign agreement enabling it to offer subsidized home loans. Other banks are sure to follow suit. PKO BP might be the first, but competition is just around the corner. Since the interest payments are subsidies only up to a certain point, and the eligible borrowers often have to take out long-term loans (25-30 years) to meet creditworthiness requirements, the subsidies will not change much in their borrowing capacity. In short, people who could not afford to take out loans before, will not be able to do so now. Another barrier for potential subsidized-loan borrowers is the cap put on the per-sqm price of the financed homes. However, the price-per-sqm criterion will be updated. We do not think that the loan interest subsidies will change much in the lending business landscape. Extended loan repayment terms According to Gazeta Wyborcza, UK’s Abbey National Bank extended the repayment periods on its mortgage loans to even 57 years. This is a result of an interest rate hike by the UK Central Bank, paired with the growing prices of homes. If the payment period had not been extended, the creditworthiness of Britons would decrease dramatically. We are seeing a similar trend in Poland, with durations reaching 45 years in some cases. Looking at what is happening in the UK, we can conclude that loan durations will increase. In our opinion, this will lead to prolonged home loan portfolio durations, and a steadying of the income earned on those products. 6.3 million credit cards Approximately 700,000 new cards were issued in the fourth quarter of last year (vs. 400,000 in Q3’06). Like every year, banks experienced an upswing during the Christmas shopping season. However, many clients received cards as add-ons to other products (cash loans, mortgage loans, installment plans), and most of them will never use them. Simpler procedures and adding cards to each product drove PKO BP’s sales to a whopping 239,000 cards in Q4’06 alone. At the end of the year, the number of cards issued amounted to 908,000, placing the bank in pole position in credit card accounts. Runners up include Lukas Bank (807,000), GE Money Bank (750,000), Bank Handlowy (662,900), BPH (487,000), and Millennium (257,000). ING BSK also recorded decent sales, the bulk of which were generated in the last quarter of 2006. But the number of card issuances has nothing to do with actual card transaction volumes. Credit cards become profitable for banks only if clients pay for their issuance. For now, both the share of

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credit cards in total cards issued (ca. 25%), and the number of credit card transactions (11% of all transactions), show that their usage is still infrequent. And, after all, banks do not start to profit on cards until clients go into debt. Factoring gains popularity Banks and specialized factoring companies purchased PLN 20 billion-worth of invoices in 2006, which was one-third more than in 2005. Businesses are increasingly turning to factoring provid-ers. The biggest gainers included Factor in Bank, Fortis Commercial Finance, and Bank BGŻ. Banks performed better than factoring companies, increasing the level of purchased debt by 63% YoY, versus 22%. Raiffeisen Bank and Pekao Facotring bought the largest number of ac-counts receivable, followed by ING Commercial Finance, Polfacotr, and GMAC Commercial Finance. The factoring market has great growth potential. Last year, Getin Bank spun off a “Factor in Bank” from its organization last year, which is currently recording the highest growth rates (compared to a small YoY base). As more and more businesses turn to banks for factoring services, bank income will grow. Record year for leasing 2006 was a record year for the leasing business in Poland. The value of leased assets amounted to PLN 21.5 billion, which was 32% more than in 2005. Last year’s leasing business was driven by vehicle leases, and, as a new development, machine and equipment leases. In EU countries, leasing has a 17% share in total investment financing (25% max). Poland is slowly catching up, with a 10% share. According to lease experts, the outlook on 2007 is good, and the market is expected to grow by up to 25%. This is another news confirming that busi-nesses are starting to become more active in using banking services. Aside from loans and leases, corporations are also increasingly looking for services like financial products and cash management. This is good news for banks that have leasing subsidiaries. And, once again, BZ WBK sets an example as a well-organized group which, by developing several business arms at the same time, has positioned itself to take advantage of the momentums in different markets. Its lease subsidiaries have a 6.1% market share. The lease market momentum is also good news for Pekao Leasing (3.5%), BPH Leasing (5.0%) (or, rather, the post-merger Pekao which will take it over), Millennium Leasing (6.2%), BRE Leasing (9.8%). These trends will also indi-rectly benefit banks with large exposure to the corporate segment, i.e., in addition to those listed above, also ING BSK and Bank Handlowy. Car loans Rzeczpospolita published a list of top car loan sellers. In pole position is still Santander Con-sumer Bank, with PLN 1117.2m car loan sales in FY2006. Below are Getin Bank (PLN 862.9m), GE Money (PLN 601.9m), Volkswagen Bank (PLN 557.8m). Further down the line are banks that sold less than PLN 400m (BPH is ninth with PLN 204m, ING BSK is fifteenth with PLN 63.5m). The best performers were banks that do not limit themselves to selling via their own branches, but that also struck partnerships with retail chains and other distributors. Banks that did not make it to the top spots in the ranking cannot be criticized: some of them do not sell car loans at all (PKO BP, Pekao, BZ WBK). This is good news for Getin Bank. We should remem-ber, however, that buyers often finance cars with cash loans (to avoid the formalities), or other forms of consumer financing. Banks spent almost PLN 590m on promotion in 2006 Promotional expenses in 2005 stood at PLN 365m, which means that they soared a whopping 60% in 2006. The YoY increase in 2005 was close to 18%. By stepping up promotional activi-ties, banks increased their share in the advertising market from 3.3% in 2005 to 4.5% in 2006. The biggest spenders included BPH (PLN 4.56m), Eurobank (PLN 45.2m), ING BSK (PLN 39m), Millennium (PLN 36.8m), Lukas Bank (PLN 33.8m), PKO BP (PLN 29.8m), Polbank EFG (over PLN 29m). Each of them had its own reasons to step up advertising: for some, it was re-branding, and for others, it was launch advertising (Polbank EFG). The underlying motivation, however, was to reach consumers in a period of prosperity in the retail banking market. We expect equally intense advertising efforts from banks this year. Bank accounts on the rise The number of personal accounts increased by 1.3m in 2006, driven mainly by lending and im-proving Internet access. At the end of 2006, the number of zloty accounts reached 17.4 million. The leader in account volumes is PKO BP (6.07m accounts), followed by Pekao (2.3m), and BPH (1.4m). The numbers grow both thanks to new as well as existing clients who own more than one account. The ratio of unbanked population is decreasing, and market saturation with banking products is increasing. But banks still have a lot of uncharted territory to cover. With time, however, as the territory shrinks, they will have to start competing with each other. But this is such a long-term perspective that it is not being taken into account in bank valuations. Bank Pocztowy’s FY2006 performance Bank Pocztowy’s FY2006 net profit was slightly higher than in FY2005 (FY’05: PLN 23.9m). BP

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currently operates 20 of its stands at post offices. According to the CEO, a list has already been drafted of 1.2 thousand more post offices that will host bank teller windows this year. BP launched the sales of its “post office express loan” (a cash loan) at the end of last year. Accord-ing to plans, the bank was to sell PLN 100m-worth of loans from September to January. The exact figure was not disclosed, but it was lower than expected due to post office worker strikes. Looking at Bank Pocztowy’s performance so far, it does not look like it should threaten the mar-ket share of listed commercial banks in the near term. PKO BP, which owns 25% of BP’s equity, wants to develop sales of its products via the post-office channels. But BP will not become a significant component of the volume-building strategy at least for another year. Santander Consumer Bank moves into retail The bank is currently the market leader in car loan sales. This year, it is going to launch a com-plete retail offer. It has been offering mortgage and cash loans for some time, but will extend the mix to include other products, such as credit cards, deposits, and personal accounts. To date, Santander has financed its lending business via interbank operations, where guarantees issued by its strategic investor with a high investment rating made it easier to acquire financing. The bank will receive a capital injection of PLN 120m to PLN 520m, as its lending activity (64% YTD portfolio growth after Q3’06) has led to a decline in its CAR to around 8%. More competition for listed banks. Polbank EFG will enlarge sales network in 2007 Polbank EFG is going to enlarge its sales network, and launch an investment fund share offer in the first half of the year. New branches are expected to reach BEP after 2.5-3.5 years. Also in the first half of the year, Polbank EFG will introduce new products for consumers and small businesses. There are no plans to launch an insurance offering for now. Polbank EFG’s current product mix includes personal accounts, savings accounts, cards, cash loans, mortgage loans, and investment and working-capital loans for small businesses. Kazimierz Stańczak confirmed that the bank’s FY2006 targets were met. Plans for the first six months of the year further in-clude an enhancement of the e-banking service functionality. It looks like Polbank EFG is here to stay and we can expect to see more of its in our streets. For now, it operates through 67 of its own branches and 61 partner outlets, but wants to expand the sales network. Polbank EFG is a new player which, for now, poses no threat to volumes generated by listed banks. The strong market momentum and the fact that the bank is just starting out means that other banks have nothing too fear in the short term, but should watch out in the longer term.

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Analyst: Marta Jeżewska19 Last Recommendation: 2007-02-05(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Net interest income 1 981.4 2 185.0 10.3% 2 375.0 8.7% 2 516.0 5.9% Number of shares (m) 28.7Interest margin 3.6% 3.5% 3.5% 3.6% MC (current price) 31 013.5Revenue f/banking oper. 3 083.9 3 530.4 14.5% 3 829.2 8.5% 4 072.8 6.4% Free float 25.3%Operating profit 1 560.9 1 973.6 26.4% 2 335.7 18.3% 2 346.2 0.5%Gross profit 1 294.4 1 706.0 31.8% 2 031.9 19.1% 2 018.5 -0.7%Net prof it 1 027.4 1 333.6 29.8% 1 601.0 20.1% 1 584.6 -1.0%

ROE 16.8% 20.2% 22.8% 21.7% Price change: 1 month 15.0%P/E 30.2 23.3 19.4 19.6 Price change: 6 month 35.5%P/BV 4.9 4.5 4.3 4.2 Price change: 12 month 36.4%D/PS 22.1 30.0 41.8 50.2 Max (52 w eek) 1 088.0Dyield (%) 2.0 2.8 3.9 4.6 Min (52 w eek) 610.0

Current price: PLN 1080 Target price: PLN 1022BPH (Hold)

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BPH WIG

BPH’s stock has risen over 17% since our last rating, therefore, we are downgrading from Accumulate to BUY. Our price target on the stock is a blend of four factors: 3.3x Pekao’s stock price, dividends from the FY2006 profit, BPH TFI’s price, and Mini-BPH’s price estimates. Pekao’s stock has also rallied recently. If we take such an increased valuation and leave all other factors unchanged, the implied price of BPH is PLN 1096/share. This estimate includes the Mini-BPH price estimate of four times its equity. Even if the actual selling price is higher, it will still account for a mere 18% of our price target on BPH. The main factor determining BPH’s stock performance at the moment is Pekao’s stock. And, since the latter shows no upside potential, the former does not either. Near-30% profit boost The bank proudly announced that its Q4’06 profit will boost the full-year bottom line by several dozen percent. The gross C/I ratio and ROE will be higher than the strategic targets of 47% and 24.3% respectively. This is in line with our expectations. We estimate that BPH will report a net profit of PLN 1.334bn for FY2006. The Q4’06 bottom line will be PLN 416m, including an estimated PLN 81m from the sale of PLN 1bn worth of non-performing loans (PLN 100m before taxes). Those numbers imply that the year-over-year increase in profit will be close to 30%, in-cluding almost 22% in recurring profit (excluding the NPL sale). More details on BPH division UniCredit reported the start of a due diligence audit at the Mini-BPH by the short-listed prospec-tive buyers. Once the audit is complete, the bidders will submit binding offers. According to un-official sources quoted by Parkiet, the list is composed of five investors (General Electric, Raif-feisen International, BNP Paribas, KBC, and an unknown organization). The shareholders of BPH and Pekao will meet in late March to approve the merger processes (most importantly the division of BPH, incorporation of assets into Pekao, and sale of the Mini-BPH). All those proc-esses will be subject to approval by relevant supervision bodies. UniCredit wants to finish the spin-off and incorporation of the remaining BPH into Pekao in the second quarter of 2007, and sell the Mini-BPH in the second half of the year. The good news is that the processes scheduled for 2007 were accelerated. The stock merger consideration will be issued earlier than we ex-pected, as will be the case with the incorporation of BPH’s assets into Pekao; similarly, the Ex-traordinary General Assemblies that we though would take place in April were moved back to March. UniCredit also officially confirmed the Mini-BPH’s status. We expect to learn its selling price in late Q1/earlyQ2. „Mini – BPH” valuation According to January speculations, the “mini-BPH” might be worth even EUR 1-1.5bn. Accord-ing to press releases, the due dilligence audit was scheduled for late January/early February, and short-listed investors were supposed to submit binding offers in mid-February. For the time being the schedule of due dilligence matches the assumptions. Unicredito said that the short-listed investors had already started the due dilligence procedure, and afterwards are expected to submit binding offers. In the context of the fact that the shareholders of BPH and Pekao will meet in late March to approve the merger processes, we believe that the investors interested in mini-BPH will submit binding offers before. As Unicredit must have some time to examine the offers, most probably they will be submitted in mid-February. While presenting “mini-BPH” valuation, the investors will give the price of BPH TFI, which will be the part of “mini-BPH” group after its sale. Therefore, we have not much time left to speculate about “mini-BPH” valuation. In the course of time the discount applied to “mini-BPH” valuation should decrease. According to the press, the

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price range of "mini-BPH” is between 2.8 and 4.3x the equity as of 1 September 2006. We maintain our view that the Mini-BPH will be sold for 4xBV.

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Analyst: Marta Jeżewska44 Last Recommendation: 2007-02-05(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Net interest income 909.3 1 021.2 12.3% 1 164.0 14.0% 1 301.4 11.8% Number of shares (m) 73.0Interest margin 3.2% 3.3% 3.5% 3.6% MC (current price) 19 443.9Revenue f/banking oper. 1 895.8 2 346.9 23.8% 2 621.8 11.7% 2 917.9 11.3% Free float 29.5%Operating profit 750.6 1 130.6 50.6% 1 327.4 17.4% 1 544.0 16.3%Gross profit 689.5 1 087.5 57.7% 1 234.8 13.5% 1 436.9 16.4%Net prof it 516.3 780.5 51.2% 899.8 15.3% 1 058.9 17.7%

ROE 16.1% 22.0% 23.1% 24.9% Price change: 1 month 13.4%P/E 37.7 24.9 21.6 18.4 Price change: 6 month 41.0%P/BV 5.8 5.2 4.8 4.4 Price change: 12 month 70.8%D/PS 2.4 6.0 7.5 8.6 Max (52 w eek) 267.5Dyield (%) 0.9 2.3 2.8 3.2 Min (52 w eek) 146.0

BZ WBK (Reduce)Current price: PLN 266.5 Target price: PLN 233.7

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BZ WBK WIG

BZ WBK’s stock appreciated ca. 20% since our last rating (January 9th), therefore, we are downgrading our rating from Accumulate to REDUCE. The market has probably already factored in investor expectations of higher-then-expected Q4’06 earnings. The Q4’06 re-port is scheduled for February 22nd. If it is good, we might revise our rating. At the mo-ment, BZ WNK trades on an ‘07P/E multiple of 21, assuming that the FY2007 net income improves by over 15%. Incentive plan On motion from the Supervisory Board, steps were taken to launch Management Stock Option Plan II for the top management of BZ WBK and its subsidiaries. Under the plan, the managers will be vested senior bonds entitling them to subscribe to BZ WBK’s shares in the future. The Board formulated and approved the basic Plan guidelines and proposed that shareholders vote to adopt them at the nearest GA. The Plan will be carried out through an issue of senior bonds entitling their holders, subject to fulfillment of certain financial criteria, to acquire the bank's shares issued within the framework of a conditional equity increase (up to 150 thousand shares between 2007 and 2010). The bank informed about its plans earlier, therefore it should come as no surprise for the market. Supervisory Board member resigns Mr. Declan McSweeney resigned as Member of BZ WBK’s Supervisory Board. The reason was not disclosed, however, we believe that this news has no impact on our view on the bank.

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Analyst: Marta Jeżewska12 Last Recommendation: 2007-01-09(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Net interest income 1 025.9 1 046.3 2.0% 1 170.7 11.9% 1 271.4 8.6% Number of shares (m) 130.7Interest margin 3.1% 3.0% 3.1% 3.3% MC (current price) 11 857.4Revenue f/banking oper. 2 232.2 2 055.8 -7.9% 2 276.8 10.7% 2 484.5 9.1% Free float 24.4%Operating profit 765.3 764.0 -0.2% 823.3 7.8% 975.0 18.4%Gross profit 793.4 803.7 1.3% 765.5 -4.8% 908.5 18.7%Net prof it 616.4 630.7 2.3% 620.0 -1.7% 735.9 18.7%


Current price: PLN 90.8 Target price: PLN 91.5Handlowy (Hold)

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Bank Handlowy WIG

We are reiterating our HOLD rating on Bank Handlowy’s stock, which edged up a little under 2% since our last Research. We do not see any upside in the stock. We believe that our valuation reflects investor expectations about the benefits of the bank’s new Retail Strategy and a rally in the corporate banking market. We do not expect to hear any details of how the Strategy implementation is going until the Q4’06 earnings release on March 1st. Our net income estimate for Q4’06 is PLN 140m, which, although flat relative to Q3 (PLN 142m), was built on growing income rather than provision reversals. We do not expect a breakthrough in the Retail segment yet. The new Retail Strategy will start to influence earnings this year.

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Analyst: Marta Jeżewska017 Last Recommendation: 2007-02-05

(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Net interest income 721.2 944.2 30.9% 1 077.9 14.2% 1 183.1 9.8% Number of shares (m) 13.0Interest margin 1.9% 2.1% 2.2% 2.2% MC (current price) 10 694.2Revenue f/banking oper. 1 641.2 1 759.5 7.2% 1 978.9 12.5% 2 179.7 10.1% Free float 18.5%Operating profit 561.2 578.2 3.0% 746.7 29.1% 883.7 18.3%Gross profit 705.8 805.0 14.0% 748.5 -7.0% 855.4 14.3%Net prof it 549.5 651.7 18.6% 596.0 -8.5% 681.6 14.4%


ING BSK (Hold)Current price: PLN 822 Target price: PLN 857.2

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ING BSK WIG

We are downgrading our rating on ING BSK to account for the appreciation in market price. The bank will release its Q4’06 earnings results on February 15th, and we will re-vise our valuation accordingly. ING BSK has broad exposure to the corporate banking market, and is therefore well-positioned to leverage the upcoming upswing in corporate borrowing (corporate debt in the banking sector was up 13% YoY at FY2006 year-end). FY2007 performance will be driven by the interest rate cut on ING BSK’s most popular savings account product, the Otwarte Konto Oszczędnościowe (since January 15th), which will boost the bank’s net interest margin and income. The product has a large share in total liabilities (ca. 1/3 of interest-bearing liabilities), it might have a positive long-term effect on ING BSK's financial performance. Deposit interest rate cut On 15th January 2007 ING BSK reduced its deposit interest rates. The cuts mainly regard the most popular savings accounts: the “OKO” for retail clients and “Zysk” for SMEs. They are not very deep, and account for 0.25 ppt. At the end of Q3’06, ING BSK managed 820,000 OKO accounts. The value of all retail savings accounts was PLN 14104 billion, including PLN 12.53bn generated by OKO. The value of ING BSK’s interest-bearing liabilities at the end of Q3’06 was PLN 42.054bn, of which almost 83% came from deposits. The share of retail savings accounts in total deposits was a little over 40%. Retail savings accounts make for one-third of ING BSK’s total interest-bearing liabilities. If the interest expense incurred on the savings ac-count portfolio is cut by 25bps, the interest expense on the total portfolio of interest-bearing li-abilities will fall by a little over 8bps. There are a few explanations for the interest rate cut: either ING BSK wants to expand and sustain its margins, or, the cut is a temporary measure designed to help finance another promotional campaign with raised interest rates on term deposits. This impact of this news for the full-year performance will be positive to neutral, but will boost the Q1’07 profit. The deposit interest rate cut is not so deep as to cause clients to leave, but, given the large volume, will drive ING BSK’s interest margin. 146,000 new accounts ING BSK managed to acquire 146,0000 new savings accounts thanks to its promotional cam-paign. The campaign was conducted on two levels: existing clients received cash rewards for bringing in new accounts, while the bank was running a parallel advertising campaign. The latter proved more effective than the clients. The bank admitted that its main objective for Retail was to acquire new accounts. This approach, paired with the lack of a major success in retail lend-ing, led to a below-market average growth in the loan portfolio. Now, as the bank steps up its corporate financing offer, there is a chance for improvement. Rating upgrade Fitch Ratings upgraded the rating for ING BSK to AA- from A+. This is a result of the recent upgrade for Poland on its foreign-currency issuer default rating.

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Kredyt Bank WIG

Analyst: Marta Jeżewska011 Last Recommendation: 2007-01-09(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Net interest income 753.4 772.8 2.6% 887.9 14.9% 1 002.5 12.9% Number of shares (m) 271.7Interest margin 3.6% 3.5% 3.8% 4.0% MC (current price) 5 704.8Revenue f/banking oper. 1 208.9 1 176.3 -2.7% 1 347.0 14.5% 1 499.8 11.3% Free float 14.5%Operating profit 329.3 435.7 32.3% 423.9 -2.7% 538.2 27.0%Gross profit 321.4 457.6 42.4% 362.2 -20.8% 464.6 28.3%Net prof it 415.9 440.1 5.8% 293.3 -33.4% 376.3 28.3%

ROE 26.0% 23.5% 13.6% 15.8% Price change: 1 month -4.8%P/E 13.7 13.0 19.4 15.2 Price change: 6 month 35.0%P/BV 3.4 2.8 2.5 2.3 Price change: 12 month 47.9%D/PS 0.0 0.2 0.4 0.4 Max (52 w eek) 24.2Dyield (%) 0.0 1.0 1.9 1.8 Min (52 w eek) 14.0

Kredyt Bank (Hold)Current price: PLN 21 Target price: PLN 21.7

We are reiterating our HOLD rating on Kredyt Bank’s stock, which has not moved since our last Research. The Q4’06 earnings report, scheduled for release on February 16th, might give an upward push to the market price. Our Q4 net income estimate of PLN 54m does not factor in one-offs such as provision reversals or deferred tax asset recognitions which add to the reported earnings figures. The sales successes achieved in FY2006 will continue this year, and commitment to fulfilling the FY2007 earnings guidance will drive valuation. 2007 will also be another year of market share rebuilding for Kredyt Bank. Af-ter a period of restructuring and start of network enlargement in 2006, income will in-crease on the back of improved volumes. Retail still the main source of income Kredyt Bank’s market share is ca. 4%. KBC has set an ambitious target of 9%, which will be difficult to achieve through organic growth. One way to advance those efforts would be to ac-quire the Mini-BPH,” but KBC stays silent on any speculations to that effect. The plan is to in-crease market share by strengthening positioning in selected segments of Retail Banking. The priorities include mortgage loans, investment funds, and credit cards. The partnership with Warta will also help in expanding market share. Kredyt Ban’s VP Bohdan Mierzwiński confirms that Retail will remain the main source of income for the bank even as other business segments are developed. He hopes to achieve an improvement in FY2007 in sales of mortgage loans (over PLN 2 billion) and investment funds (assets now exceed PLN 3bn, including PLN 1.24bn generates last year). FY2006 showed that, after a period of restructuring and rebranding, Kredyt Bank started to acquire new accounts and increase sales volumes. FY2007 will bring the first effects of those efforts. We expect a considerable improvement in recurring operating income before provisions, achieved on the bank of robust income growth and thanks to the fact that the sales network enlargement is financed from savings on the old cost base (ensuring moderate increase in expenses). This is in line with our predictions.

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Analyst: Marta Jeżewska16 Last Recommendation: 2007-02-05(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Net interest income 480.1 650.5 35.5% 762.5 17.2% 922.2 20.9% Number of shares (m) 849.2Interest margin 2.3% 2.8% 2.9% 3.0% MC (current price) 9 850.5Revenue f/banking oper. 1 465.3 1 253.1 -14.5% 1 534.7 22.5% 1 866.3 21.6% Free float 34.5%Operating profit 704.8 409.4 -41.9% 546.2 33.4% 738.1 35.2%Gross profit 709.7 370.8 -47.8% 458.5 23.7% 623.9 36.1%Net prof it 567.1 300.8 -47.0% 371.4 23.5% 505.3 36.1%


Millennium (Reduce)Current price: PLN 11.6 Target price: PLN 9.9

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MILLENNIUM WIG

Investor reaction to Millennium’s Q4’06 earnings report more than factored in the strong performance. We believe that the stock already prices in the high net-income expecta-tions for the years ahead (‘09/06 CAGR at 31%), even despite the inevitable increase in costs related to network expansion. The ’06 P/E is 32.2, and the FY2007 estimate is 26.1 (in spite of expected 23.5% in FY2007 net income). The Q1’07 earnings will reflect sea-sonal weakness in the banking industry relative to Q4’06 (the Christmas shopping sea-son is always the best time for banks), the bank’s growing network expenses, and weaker performance by the brokerage business (no handling of transactions related to reduction by BCP of its interests in Millennium). We are downgrading our rating on Mil-lennium from Hold to REDUCE. We expect to see an improvement in the coming quarters which, however, has already been discounted in the stock price. 4Q 2006 results – above consensus Millennium’s Q4’06 bottom line of PLN 89m beat both our expectations (PLN 76m) and the ana-lysts’ consensus (PAP: PLN 74m; Parkiet PLN 71m). The net profit figure was generated based on the group’s recurring income streams. The highlight of the Q4 earnings figures was fee in-come at PLN 114m, beyond our expectations and the consensus (between PLN 93m and 97m). The robust increase in recurring banking income more than offset the additional expansion costs. Total costs were higher than expected (PLN 257m vs. our est. PLN 216m and PAP con-sensus of PLN 225m). We were very impressed with Millennium’s fourth-quarter performance, especially the stellar fee income figure and revised upward our financial projections for the bank for the years ahead. For more information, refer to our analytical research on Millennium of 29 February 2007. Brain drain PR News portal said that a large group of transaction banking experts from BPH are soon going to transfer to Millennium. Millennium will set up a Transaction Banking Department within its Corporate Banking Division. This is good news for Millennium, neutral to the sale of the “mini-BPH,” and not so good for the “Enlarged Pekao.” The mini-BPH would not be able to retain those experts anyway, and, after all, all corporate centers are being transferred to Pekao. The Enlarged Pekao could have problems integrating the corporate segment, especially considering that it has been one of BPH’s main strengths. Unfortunately, that strength was largely derived from the human capital. There had been talk before that Millennium took advantage of the un-certain situation of BPH’s employees and solicited their mortgage loan consultants aside from the mortgage loan-driven retail segment. Development of corporate banking which, so far, has not been wildly successful, could bring Millennium stability and mitigation of the risks entailed in relying on just one product. Aiming to beat the market Millennium’s factoring sales in FY2006 increased by 123% (YoY). The bank purchased debt worth over PLN 1.4bn. Its representatives estimate that the factoring market will grow 30% an-nually and Millennium wants to go faster than that. Millennium’s market share is currently 7%. Its factoring business accelerated after the incorporation of the subsidiary Forin which boosted cross sell. The sales network has been enlarged, and the number of account managers has increased by 70%. If Millennium manages to expand the segment of its business targeted to corporate accounts (mainly SMEs), its income stream will be steadier . We believe that the sec-ond pillar like corporate services would be a good move on the bank’s part. Mortgage loan sales go hand in hand with market growth Millennium wants to up its FY2006 mortgage loan sales figure in FY2007. Its goal is to achieve

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growth in line with the markets. The bank hopes to generate PLN 1 billion on average per quar-ter, and scale up the overall mortgage loan portfolio to PLN 10bn by the end of the year. Millen-nium will therefore focus on retaining its position. According to estimates, sales of mortgage loans across the banking sector will increase by 30%-40%. The share of zloty mortgage loans in total sales is on the rise while, in January, it was eight percent, by December, it surged to 35%. Millennium’s representatives believe that the sales structure will be retained in 2007, with an over-30% share of zloty loans. The bank’s sales estimates are close to what has recently been announced by the Polish Banks’ Association (it was determined that banks extended PLN 41bn-worth of mortgage loans in 2006, and, in 2007, that number is expected to reach PLN 55bn, which means that sales will rise 34%). Millennium’s plans are in line with our estimates for its mortgage lending business. We assume that the loan portfolio at the end of 2007 will be worth PLN 10.5bn. Sale of NPLs As promised, Millennium signed an agreement to sell its past-due receivables to the securitiza-tion fund “Bison Niestandaryzowany Sekurytyzacyjny Fundusz Inwestycyjny Zamknięty” man-aged by BPH TFI. The total value of the NPLs is PLN 541.6bn. The price was not disclosed. Its estimated impact on net profit will be PLN 6.9m. The bank had announced earlier that it was going to sell approximately PLN 500m-worth of bad loans by the end of Q1 2007. We did not include that sale in our FY2007 projections, which include a net profit estimate of PLN 371m. If we factor in the NPL sale in bottom line estimates, the implied net profit is PLN 378m, and PLN 6.9m accounts for 1.8% of that amount. Assuming that the bank pays out 48% of its consoli-dated profit as dividends to shareholders, PLN 6.9m added to net profit makes for less than PLN 0.01 per dividend. Accordingly, the sale will not have a big impact on the bank’s FY2007 earnings. This is in line with our expectations. that Millennium would sell its bad loans for the purposes of reorganizing its bad debt, not for profit. For more information on our valuation of Millennium, refer to our October 26th, 2006 Research.

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Pekao WIG

Analyst: Marta Jeżewska016 Last Recommendation: 2007-02-05(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Net interest income 2 350.4 2 344.5 -0.3% 2 612.8 11.4% 2 816.7 7.8% Number of shares (m) 166.8Interest margin 3.9% 3.5% 3.6% 3.7% MC (current price) 43 370.1Revenue f/banking oper. 4 342.3 4 567.1 5.2% 5 011.9 9.7% 5 440.1 8.5% Free float 43.1%Operating profit 2 066.9 2 330.3 12.7% 2 694.5 15.6% 3 042.4 12.9%Gross profit 1 873.6 2 205.5 17.7% 2 550.0 15.6% 2 876.2 12.8%Net prof it 1 537.7 1 794.5 16.7% 2 065.5 15.1% 2 329.7 12.8%


Current price: PLN 260 Target price: PLN 237.6Pekao (Hold)

It seems like our postulate that Pekao is a more attractive investment than PKO BP is proving correct. Because Pekao’s market price has appreciated over 16% since January 9th, we are downgrading our rating from Accumulate to HOLD. We believe that the stock already prices in the expected benefits of the upcoming merger with BPH. We expect the merger factor to continue to reflect positively in Pekao as the bank fills us in on further merger details (possibly on he occasion of the Q4’06 report release on February 21st). We might revise our valuation on a good news flow. Looking at the current price, we rec-ommend to hold positions in Pekao’s securities.

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Analyst: Marta Jeżewska016 Last Recommendation: 2007-01-09

(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Net interest income 3 544.5 3 791.7 7.0% 4 285.7 13.0% 4 801.5 12.0% Number of shares (m) 1 000.0Interest margin 4.0% 3.9% 4.1% 4.3% MC (current price) 48 080.0Revenue f/banking oper. 5 699.1 6 050.2 6.2% 6 854.2 13.3% 7 687.1 12.2% Free float 43.1%Operating profit 2 304.6 2 725.0 18.2% 3 297.0 21.0% 3 844.2 16.6%Gross profit 2 167.0 2 678.2 23.6% 2 986.0 11.5% 3 473.5 16.3%Net prof it 1 734.8 2 101.7 21.2% 2 337.6 11.2% 2 716.2 16.2%


PKO BP (Reduce)Current price: PLN 48.1 Target price: PLN 41.6

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PKO BP WIG

In light of the continuing lack of decisions regarding the incomplete Management Board lineup, we are reiterating our REDUCE rating on PKO BP’s stock. The strong momentum in the Retail segment will drive income in the quarters ahead, but the persisting decision-making and innovation deadlock causes the bank to lose its edge over competition. We see the biggest threat to PKO BP’s business not in the enlargement of Pekao, but rather in the increasingly aggressive and dynamic growth of its smaller rivals. Resignation by VP Jacek Obłękowski, who was in charge of Retail, PKO BP’s main strength, added fur-ther to the general indecision. The fact that the Management Board only has three mem-bers (+acting CEO Marek Głuchowski, Chairman of PKO BP's Supervisory Board), the unfilled CEO spot, the incomplete Supervisory Board lineup, and the postponement of new Strategy announcement from Q1’07 to Q2’07 all make for a bad news flow. That is why, even if the bank posts better-than-expected Q4’06 earnings results, investing in PKO BP as a mid-term investment is very risky. Supervisory Board fails to nominate CEO and VPs PKO BP’s Supervisory Board did not manage to elect a new CEO and two vice-presidents, and suspended the recruitment process until further notice. The reason was resignation by Jacek Osiatyński from his function as Supervisory Board member, after which the Board had no quo-rum to vote. Now, PKO BP has to call an Extraordinary General Meeting to complete the Super-visory Board lineup to give it power to elect the CEO and VPs. It was announced that the proce-dures will last until the beginning of May. This means that the bank will remain without leader-ship at least for another month. Jacek Obłękowski resigns as VP Mr. Obłękowski was responsible for Retail, PKO BP’s key line of business. He did not anoint a replacement. Him stepping down is a threat to PKO BP’s business. Because a new CEO and VPs cannot be nominated before the Supervisory Board once again works in its statutory lineup, the persistent indecision might affect the bank’s performance in the medium term. The Manage-ment Board is left with three members: Wojciech Kwiatkowski, Rafał Juszczak, and Zbigniew Sokal. Marek Głuchowski, Chairman of PKO BP’s Supervisory Board, will work as acting CEO until April 10th. Request to the KNB to approve Mr. Juszczak as MB member As expected, after the last Management Board member who had approval of the Commission for Banking Supervision (KNB) left the bank on January 1st, the Supervisory Board filed a re-quest with the KNB to issue a similar approval for Rafał Juszczak. New Strategy announcement A while ago, PKO BP announced that it was preparing a new strategy plan spanning a longer horizon than the strategy currently in force. The full Strategy was supposed to be revealed in late first quarter, preceded by an unveiling of the general strategic outline at the beginning of the year. But no such announcements have taken place so far, although acting CEO Marek Głu-chowski promised that the Strategy work is a priority task for the bank, and that the new CEO would reveal the details in Q2’07. This is only a small delay relative to the original promises, but we would not be surprised if the Strategy announcement was postponed further due to the pro-longed management instability. Mortgage loans – sales up at least 20% PKO BP is hoping to step up sales by at least 20% in 2007. Last year’s sales amounted to PLN 11 billion. The mortgage loan portfolio is supposed to grow at a two-digit rate. One competitive

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advantage will be the agreement that PKO BP signed with Bank Gospodarstwa Krajowego con-cerning government-subsidized interest payments on mortgage loans provided for in the new laws on supporting families in buying homes. PKO BP hopes to underwrite at least PLN 1.5bn in such loans. Last year, sales were up 45%, and the portfolio rose by over 20%. At the end of Q3’06, the gross value of the bank’s mortgage loan portfolio stood at PLN 21.1bn, compared with PLN 16.8bn at the end of FY2005 (a 25.6% increase in nine months, PLN 4.3bn change). At that time, PKO BP declared loan sales growth at a rate twice as high as portfolio growth. The reasons included early repayments of the mortgage loans (meaning the new portfolio), the cli-ents switching to other banks, and the regular loan payments (the older the loan, the more in-clined the borrowers were to choose shorter payment terms). This year, PKO BP’s target is to sell at least PLN 13 billion in loans. The two-digit growth rate will be sustained on the portfolio, but the increasing reference figures will lead to slower growth. We believe, however, that PKO BP will achieve this goal due to its market position, which will be strong until the good economic situation continues (not very likely to change). Therefore, it is hard to be pessimistic about it. FY2006 profit distribution Paweł Szałamacha, Vice-Treasury Minister, announced that the payout ratio from the FY2006 income will be close to last year’s, when PKO BP paid out 47.71% of its standalone net profit (a little over 46% of consolidated profit) to its shareholders. The dividend announcement is in line with our expectations. If we assume that net profit will be reported at PLN 2.1bn, this means PLN 0.97/share. As profit is expected to have gained over 21% YoY, dividends will be equally higher. Since the statement by the Vice-Treasury Minister was in line with our expectations, there is no need for us to revise our projections. PKO TFI PKO TFI recorded PLN 3.3bn inflows last year. An acceleration came in the fourth quarter when funds collected PLN 1.56bn vs. PLN 1.78bn in the first nine months 2006. The transfer of PKO BP’s deposits to investment funds might have been partly responsible for that success. At the end of September, PKO BP’s deposit accounts were worth PLN 82bn, including PLN 55.4bn in retail accounts. To advance sales, the new CEO decided to start a campaign to persuade more clients to transfer their deposits to investment funds, and to enlarge the network of fund distribu-tors. PKO BP’s deposit base is indeed a right source of inflows for investment funds. However, we still do not know who will become the new CEO. We believe that PKO BP will be increasing investment fund share sales this year. Deposit transfers to funds may boost the fee income.

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Gas & Oil, Chemicals Problems with Druzhba pipeline deliveries In January oil deliveries via Druzhba pipeline were shut for a couple of days, due to conflict be-tween Russia and Belarus. As the answer to Russian crude oil tariff increase, Belarus imposed customs duties on Russian oil transit through Belarus. Transnieft, Russia’s crude pipeline op-erator, claims that Minsk had no legal grounds to impose the customs duties and decided to shut oil deliveries. In the end both parties reached an agreement, and that deliveries have been resumed. The short-lasting shutdown did not have impact on operating activity of Polish refiner-ies. Lukoil enters Poland The Russian company will probably open the first of its pumping stations next month. Initially, there will be only the four stores bought from BP Poland, but, in two years’ time, the rebranding of the 82 stations taken over from ConocoPhilips will be complete. This number of pumping stations would give Lukoil a mere 2% share of the retail market, so, we should expect further expansion and takeovers in the coming years. The fuel supplier for Lukoil’s stations will proba-bly be Lotos. Lukoil will probably retain the “economy” profile of the ConocoPhilips stations it took over. Lukoil’s Poland launch will not change the retail market landscape in any significant way in the near future. Law on fuel inventories The Sejm adopted a new Act on fuel inventories. Crude oil inventories are to be increased to last for up to 90 days of annual consumption in 2008 (distributors currently maintain inventories at 66 days), and natural gas inventories will last up to 30 days (now 3% of sales, i.e. ca. 11 days). In our opinion, the increased costs of establishing and maintaining the enlarged invento-ries will be transferred to end users. Furthermore, when it comes to gas, meeting the new re-quirements will necessitate construction of large storage space, as already announced by PGNiG (the expenses were taken into account by the URE when setting prices).

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Analyst: Kamil KliszczLast Recommendation: 2006-08-24

(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 9 645.5 12 907.0 33.8% 12 319.8 -4.5% 11 731.7 -4.8% Number of shares (m) 113.7EBITDA 1 333.5 1 130.0 -15.3% 1 024.9 -9.3% 1 068.0 4.2% MC (current price) 5 218.8EBITDA margin 13.8% 8.8% 8.3% 9.1% EV (current price) 5 384.5EBIT 1 069.9 829.0 -22.5% 725.4 -12.5% 742.9 2.4% Free float 41.0%Net profit 915.1 662.0 -27.7% 509.2 -23.1% 514.4 1.0%

P/E 5.7 7.9 10.2 10.1 Price change: 1 month -1.7%P/CE 4.4 5.4 6.5 6.2 Price change: 6 month -7.8%P/BV 1.1 1.0 0.9 0.9 Price change: 12 month -10.9%EV/EBITDA 3.7 5.0 6.1 5.9 Max (52 w eek) 59.9Dyield (%) 0.3 0.0 1.0 1.0 Min (52 w eek) 41.6

Lotos (Accumulate)Current price: PLN 45.9 Target price: PLN 59.3

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LOTOS WIG

Management reshuffle? Newspapers speculate that we might see a management reshuffle at Lotos in the coming weeks. Among those expected to be dismissed is Lotos’s CEO Paweł Olechnowicz, which comes as a surprise in light of the praise he has received recently from PiS leaders about his oil supply diversification policy. However, the Treasury Ministry denies rumors about the reshuffle, as does Olechnowicz. PLN 100m investment in Retail Lotos is going to invest PLN 100m in new pumping stations. The company wants to increase the number of stations from ca. 400 to 450 (10 of which will be built by the company itself, and the rest will be acquired through partnership agreements). Lotos aims to increase its share of the retail fuel market from 7,5% to 10% in six years’ time, but not by increasing the number of stations (by 2010, that number will decrease to ca. 380 as affiliated stations discontinue partner-ships), but by improving sales performance (from an average 7,5 thousand liters to 10 thousand liters a day).

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PGNiG WIG

Analyst: Michał MierzwaLast Recommendation: 2007-02-05

(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 12 560.0 15 676.5 24.8% 17 062.0 8.8% 17 300.1 1.4% Number of shares (m) 5 900.0EBITDA 2 654.5 2 900.9 9.3% 3 089.4 6.5% 3 707.6 20.0% MC (current price) 23 777.0EBITDA margin 21.1% 18.5% 18.1% 21.4% EV (current price) 21 906.2EBIT 1 252.6 1 465.2 17.0% 1 510.9 3.1% 2 064.7 36.7% Free float 15.3%Net profit 879.7 1 148.9 30.6% 1 242.3 8.1% 1 703.0 37.1%

P/E 27.0 20.7 19.1 Price change: 1 month 11.6%P/CE 10.4 9.2 8.4 Price change: 6 month 24.8%P/BV 1.1 1.2 1.2 Price change: 12 month 15.1%EV/EBITDA 8.7 7.9 7.6 Max (52 w eek) 4.1Dyield (%) 0.6 3.7 3.9 4.2 Min (52 w eek) 3.1

PGNiG (Suspended)Current price: PLN 4 Target price: -

LNG talks with Algerian party In January the negotiations were held with the delegation of Algerian Energy Office from the biggest resource company – Sonatrach, on the eventual LNG deliveries to a gas terminal that will be built in Świnoujście. Currently the Algerians export ca. 26 bn cubic meters of LNG and the volume is expected to increase to 100bn cubic meters in 2011 (Algeria has 7th place in world natural gas reserves). According to preliminary assumptions, Poland could receive first deliveries in 2011 of 2.5bn cubic meters in the initial years (in 2010 the contract with RosUkrEn-ergo for natural gas deliveries of 2.5bn cubic meters terminates). No changes in EuroPolGaz Negotiations with Russians to bring order to the Management Board and work out a joint stance on transit fees failed. The Russian side decided that, until their terms are accepted (lower transit fees and waiver by the Polish side of its deciding vote in the Management Board), they are go-ing to obstruct the work of the Supervisory Board and limit it to handling technicalities. Gaz-prom’s tough stance in the negotiations with PGNiG is in line with its strategy of taking over control over the gas transit network in the region, and broader plans to transform itself from ex-porter to distributor in certain areas. The Polish arguments, of keeping Europolgaz’s debt ser-vice against Gaprom Bank, are sound, however, the decisions about higher transit tariffs most probably will remain “dead”, just as last year when the Russian concern paid self-calculated rates. Taking the matter to court will not change anything (but prolong the conflict as the parties go from arbitrator to arbitrator), like idea of the Ministry of the Economy to sell Gazprom’s debt. New LNG terminal first, interconnectors later According to PGNiG’s CEO, the company’s new strategic propriety will be to diversify gas sup-plies, not only to Poland, but to the whole region (PGNiG is in talks with Baltic countries). The Management wants PGNiG to become an active player on the market of gas distribution in Cen-tral and Eastern Europe, and an LNG terminal will facilitate lower prices of gas purchases as suppliers compete with each other, and as Poland re-exports the fuel. The construction of inter-connectors will start only after diverse gas sources are secured (gas terminal, Norwegian pipe-line). It is hard to be optimistic about PGNiG’s ambitious plans when we hear about partnership and upstream exchange plans from Gazprom and the Algerian Sonatrach – reportedly one of the main future suppliers of LNG to Poland. In the end, the diversification plans to ensure inde-pendence from Russian gas might turn out to be apparent freedom only, which would be too bad considering how expensive their implementation is going to be. The idea to engage in gas re-exports also involves considerable risks in light of the LNG terminal project being prepared in Germany, and Gazprom’s refusal to sell gas through intermediaries. In our opinion, without ma-jor upstream investments, PGNiG will not be able to establish itself as a major player in the CEE gas market. Ciech not for PGNiG The Ministry of the State Treasury has denied the recent rumors that PGNiG might acquire Ciech’s equity stake from Kompania Węglowa. The Ministry does not want the gas company to become involved in the chemical business at a time when it has large expenses related to its strategy. This means that PGNiG will not be the one to integrate the Polish chemical industry as originally planned. The main integrator will therefore be Ciech, which still wants to take over ZCh Police. This is good news for PGNiG’s shareholders; such an acquisition would distract its executives who are currently focused on building a strong gas company with a presence not only in Poland, but in the CEE region. This is a much tougher and riskier path in our opinion than market integration, and the returns on the investments made the way will take a long time to realize. But for PGNiG to establish equity ties with its key accounts would be a reasonable move that would secure the company against customer losses (especially plants located in south-eastern Poland) after the gas market becomes deregulated.

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(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 41 188.3 50 949.0 23.7% 49 372.0 -3.1% 52 887.3 7.1% Number of shares (m) 427.7EBITDA 6 727.6 5 254.0 -21.9% 4 847.0 -7.7% 5 382.9 11.1% MC (current price) 20 187.9EBITDA margin 16.3% 10.3% 9.8% 10.2% EV (current price) 26 261.4EBIT 4 947.6 3 274.0 -33.8% 2 808.0 -14.2% 2 664.6 -5.1% Free float 72.5%Net profit 4 585.1 2 670.0 -41.8% 2 285.0 -14.4% 2 215.8 -3.0%

P/E 4.4 7.6 8.8 Price change: 1 month -4.0%P/CE 3.2 4.3 4.7 Price change: 6 month -11.1%P/BV 1.2 1.1 1.0 Price change: 12 month -25.8%EV/EBITDA 3.9 4.8 5.1 Max (52 w eek) 67.0Dyield (%) 4.5 4.3 5.3 5.6 Min (52 w eek) 44.5

PKN Orlen (Buy)Current price: PLN 47.2 Target price: PLN 66

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PKN WIG

Kownacki replaced Chalupec PKN Orlen’s Supervisory Board dismissed Igor Chalupec from the CEO position, and replaced him with Piotr Kownacki, VP in charge of audit and regulations. The government argues that the change was necessitated by Poland’s energy security which will be better safeguarded by an experienced government official (Mr. Kownacki worked at the Supreme Chamber of Control). After being discharged from PKN Orlen’s Management Board, Igor Chalupec resigned from his CEO position at Mazeikiu Nafta and Supervisory Board Chair position at Unipetrol. Mr. Kow-nacki is obviously a political appointment, and one that is far from being justified by energy se-curity issues. A man without experience and contacts in the fuel industry cannot be expected to speed up PKN Orlen’s upstream building exercise, which is the basic way in which the company can make itself independent of Russian supplies. No changes in Strategy OKN Orlen’s CEO Piotr Kownacki has no plans to modify the company’s strategy in the near future. The priorities remain the same: to integrate the company’s foreign assets and gain ac-cess to oil deposits. Vice-Treasury Minister Paweł Szałamacha believes that the upstream pro-jects should be accelerated. One of the biggest challenges for the CEO will be to restore full capacity at the Mazeikiu refinery, which might take longer than initially thought. The CEO of the Lithuanian refinery said that it might take up to 14 months to set up a new system (earlier, there was talk of 9 months). But a system which was shut down for an upgrade will be put back in operation as soon as February, increasing the refinery throughput. Mazeikiu Nafta currently processes 11 thousand tons of crude oil a day versus 15 thousand tons before the fire. Supply contract for Mazeikiu Nafta PKN Orlen signed an agreement to supply crude oil to Mazeikiu Nafta on an exclusive basis. The agreement is in line with the Management’s strategy of centralizing and streamlining oil purchases across the group. Its value will amount to us $19bn over the next five years. Anwil’s tender offer for Spolana shares Anwil is holding a mandatory tender offer for outstanding 4.82% (the remaining 13% belongs to Orlen). The tender price (CZK 162) seems attractive compared to a unit price paid for an 82.2% control stake in Unipetrol (CZK 104.4) and the current market price (CZK 155). In this context Anwil most probably intends to withdraw Spolana from the Prague Stock Exchange. Crude oil contract PKN Orlen signed an agreement with Petraco Oil for 3.36m-ton annual Rebco crude deliveries through the Druzhba pipeline. The estimated value of the deliveries is PLN 18.1bn. The agree-ment will run through 2011, and the crude will come from fields owned by Rosneft. PLN 8.5bn deal with Dwory PKN Orlen signed a 15-year contract with Dwory for ethylbenzene and butadiene deliveries estimated at PLN 8.5 billion. The contract also provides that PKN will buy a 49% stake in Ety-lobenzen Płock from Dwory. Kazachstan: the most popular destination? According to press reports, Orlen’s upstream strategy includes acquisitions of operations lo-cated in the Caspian Sea region, especially Kazakhstan. The company is probably considering striking partnerships with companies from that region, including KazMunaiGaz, but it will not able to do so without being backed by the Kazakh President who has the deciding voice when it comes to such strategic arrangements (the visit of Polish President was scheduled at March). Kazakhstan’s government is not going to issue any exploration licenses over the next two years,

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allegedly to prevent excessive expansion of Chinese oil companies. But the real reason might be pressure from Russian oil companies who are using the fact that Kazakhstan has to trans-port oil via Russia to curb competitive production. Kazakhstan currently exports ca. 57 million tons of oil a year, but most of this volume passes through Russia (ca. 40m tons). The alternative is sea transport, currently accounting for some 10 million tons a year. Orlen could additionally hedge the oil deliveries through swap agreements, thus achieving its goal of securing diverse crude sources. However, we must keep in mind that, in the initial stage, the Polish company is going to become involved in upstream projects as minority shareholder, so, tangible effects of its upstream strategy will not become noticeable for several years, while the expenses will be incurred soon. Tender offer for outstanding Mazeiku shares PKN Orlen is holding another tender offer for shares of the Lithuanian refinery (0,8% are still outstanding, as in the previous tender Orlen purchased 5.06% shares) at the same price as the one before. At the same time, the company signed an agreement with the Lithuanian govern-ment concerning forced buyout of the minority shareholders. After buying back the outstanding 0.8% shares, Orlen will probably delist Mazeikiu Nafta from the Lithuanian stock exchange. What about contract damages claim against Yukos? According to press, Orlen might be allowed to bid for Yukos's assets in exchange for dropping its US $109m claim for default by the Russian oil company under a contract for oil supplies to Płock. Orlen has offered no comment as yet, but an anonymous insider told a newspaper that the Management is not ruling out any solutions at this time. Unipetrol schedules maintenance downtime for 2007 Unipetrol’s CEO warned that the investment projects planned by the Czech holding company, estimated at PLN 550m, will require several weeks of scheduled downtime. Such downtime is bound to affect the company’s FY2007 earnings, but the CEO did not offer an estimate. As a reminder, 14-day maintenance downtime at Chemopetrol and Ceska Rafinerska in Q4’06 re-duced their bottom lines by PLN 56m. Bank of New York below 5% Bank of New York reduced its equity interest in PKN Orlen from 5.11% to 4.95% by exercising a part of its depositary receipts.

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ZA Puławy WIG

In spite of weak fourth-quarter results and the January increase in PGNiG’s gas prices which will boost the costs of basic materials, we recommend to ACCUMULATE ZA Pu-ławy’s stock, which we price at PLN 64.76/share. We believe that, under the lead of its new CEO, the company is looking at some very interesting growth opportunities, and that its new strategy, currently a work in progress, will change the way it is perceived by investors. By overcoming the decision-making problems it struggled with in the past, and by coming up with a workable growth concept, ZAP is slated to become an active integrator of the chemical market employing leading-edge technology solutions. While we wait to learn the strategic objectives (scheduled for release in March), we encourage investors to buy into ZAP’s growth story while it is still bargain priced. Emfesz contract terminated ZA Puławy terminated the natural gas supply contract with Emfesz signed in March 2006. The Hungarian company was to deliver 150 million cubic meters of natural gas in 2006, but was not able to start the deliveries due to problems with signing a gas transmission and storage agree-ment with PGNiG and GazSystem (proceedings are currently underway before the UOKiK to determine whether those two companies engaged in price collusion). Puławy’s Management explained that they had to terminate the contract to be able to plan and balance its gas supplies, and sign contracts with other suppliers, i.e. PGNiG. This looks like a reasonable move on the Management’s part, given that the Emfesz contract was “dead” anyway, but, in our opinion, a better way to solve this problem would have been to file a complaint or action for loss-of-profit damages (Emfesz’s gas was supposed to be cheaper), possibly giving rise to a more vigorous discussion on deregulation of the Polish market of gas distribution. Simply backing out of the Emfesz contract means that Puławy will remain dependent on the local monopolist which is not likely to be willing to make concessions in the delivery terms. This issue is a part of a broader discussion about the liberalization of the Polish gas market, which still seems far from happen-ing despite the investigation being conducted by the competition watchdog UOKiK and warnings from the European Commission. The lack of concrete plans and a market deregulation schedule are not helping Puławy, which are doomed to rely on the Polish monopolist. Power supply agreement Puławy’s Management signed a one-year power supply contract for 2007. Its estimated value is PLN 164m, i.e. PLN 5m more than in 2006. That increase in electricity costs is due to increased volumes and the price policy of the Energy Regulatory Office (URE). The cost increase will not be significant in yearly terms and will not affect considerably ZA Puławy's earnings. Employee stock allocation close to finish line The State Treasury’s stake in Puławy decreased from 71.15% to 61.49% following employee stock allocations. The State Treasury now owns 11.75m shares, which means that 92% of the shares earmarked to be acquired by employees have already been allocated. Those shares will not be eligible for trading until February 1st, 2008. US corn demand on the rise The US Department of Agriculture projects that the record demand for bioethanol might boost corn usage by close to 50% in the current season (ending in September). The prices of corn soared almost 86% over the past year, and the world corn inventories fell by one-third even though the crop yield in the US was the third largest in the world. This news relevant to Pu-ławy’s business in that it means a considerable increase for nitrogen fertilizers (corn is a nitro-philous plant). From what we know, US fertilizer producers have been working at full capacity for several months to meet the growing demand driven by increasing corn production. In light of those developments, it seems unlikely that the seasonally lower prices of natural gas in the USA


(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 2 030.4 2 070.6 2.0% 2 070.3 0.0% 2 072.2 0.1% Number of shares (m) 19.1EBITDA 274.4 212.4 -22.6% 218.0 2.6% 213.1 -2.3% MC (current price) 1 118.2EBITDA margin 13.5% 10.3% 10.5% 10.3% EV (current price) 682.9EBIT 157.0 101.6 -35.3% 105.5 3.9% 97.7 -7.4% Free float 38.4%Net profit 126.2 89.7 -28.9% 97.4 8.6% 92.5 -5.0%

P/E 8.9 12.5 11.5 12.1 Price change: 1 month 0.9%P/CE 4.6 5.6 5.3 5.4 Price change: 6 month 7.3%P/BV 1.0 0.9 0.9 0.8 Price change: 12 month -9.4%EV/EBITDA 2.9 3.5 3.1 2.9 Max (52 w eek) 79.5Dyield (%) 2.8 3.4 2.4 2.6 Min (52 w eek) 51.2

Za Puławy (Accumulate)Current price: PLN 58.5 Target price: PLN 64.76

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(now back on an uptrend due to bad weather forecasts) could change the direction of fertilizer exports and cause an oversupply in Europe. On the contrary, fertilizer exports to the US might become even more profitable for European producers.

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5 February 2007 31


Telecommunications Polkomtel has WLR The UKE ruled to allow Polkomtel to use TPSA’s network via WLR. Polkomtel currently offers fixed-line calls to its few clients via carrier pre-selection. WLR will enable the operator to expand in the fixed-line market thanks to TPSA's infrastructure. Polkomtel is also planning to launch a broadband offering (bitstream access) similar to Netia and GTS Energis. The UKE decided that Polkomtel would get a 46.99% discount on wholesale line rental from TPSA. We anticipate that Polkomtel needs about six months to come up with an offer that will change the market land-scape, comprising a full range of fixed-line and mobile services. The operator has enough cash, a recognized brand name, and the necessary distribution network to achieve this. The impact will be felt the hardest by TPSA. TPSA loses, Netia gains clients According to unofficial sources, two days after Netia launched its bistream access offer targeted to TPSA’s clients, TPSA has already lost 5000 of its broadband users, and 17,000 more de-clared that they would do the same in the next few days. Netia’s offer is not particularly attrac-tive (prices are 11% lower than TPSA’s), still, clients of the National Operator seem to be very inclined to switch. We will see over the next few days whether this is just a short-lived trend, and the number of TPSA users switching to Netia decreases. Much will depend on whether the ser-vice operates without problems and satisfies clients. Netia is the first operator to enter the retail market. In the next 3-5 months, it will be followed by GTS Energis, Dialog, Exatel, E-Tel (Telekom Austria), which will increase competition. Tele2 is also waiting for permission from the UKE, and we should remember that it has been “stealing” customers away from TPSA since January through WLR. Though with a slight delay, the scenario we had predicted for the Polish telecom market is starting to pan out. This news might have a positive short-term impact on Netia. But this strength should be used to reduce positions in our opinion, and the same goes for TPSA. 96% mobile penetration According to GUS data, operators had issued 37 million active SIM cards by the end of 2006, meaning that the market hit 96% penetration. In Q4 alone, operators added 2 million new cards to their user bases. We predicted that market saturation at the end of 2006 would increase to 94-95%. That the growth was faster is good news for TPSA, and bad news for Netia, for rea-sons that we spoke about before. 2007 will probably mark an increase in penetration to ca. 110-115%, largely propelled by the emergence of MVNOs who will offer various add-on services to their clients. Existing operators will also tap into that growth (wholesale line rental revenues). Looking at the “quality” of the prospective MVNOs, Polkomtel is positioned to benefit the most from its virtual operator customers, followed by Era and Centertel. The launch of P4, with its competitive price campaign, might also change the market landscape which, today, is charac-terized by limited competition, allowing operators to earn high margins. P4’s debut is scheduled for late Q1/early Q2. VOiP awareness A November 2006 survey by TNS OBOP showed that a whopping 88% of Poles have no idea what “VoIP” is. Only 1% of the respondents regularly used internet telephony, and 6% knew what it was. 5% heard something about VoIP, and 88% had no idea what it was. Answering a question about how VoIP can be used to make calls, only 40% from among the respondents who had heard about VoIP knew that it can be done via a regular handset and a regular fixed-line number in any number zone. An optimist would say that such low awareness among consumers means that the market situation of TPSA and its traditional voice services is safe. From a pessimist’s standpoint, awareness will rise like a tide after reaching some critical mass, and drive clients away from POTS. We concur with the latter. Growing broadband penetration, low costs (ca. 80% savings), good quality and functionality (regular analog handsets) will ultimately lead to a VoIP boom in a matter of two years. GTS Energis – WLR for business users Starting in March, GTS Energis will offer TPSA’s business users subscription services under a WLR arrangement. To date, the only operator offering WLR was Tele2, which focuses mainly on retail users. In the coming months, this area of telecom services will become more populated as new operators join the market game, including Dialog, Exatel, Polkomtel, E-Tel (Telekom Austria).

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Analyst: Michał MarczakLast Recommendation: 2006-09-06

(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 908.6 876.5 -3.5% 971.7 10.9% 1 088.0 12.0% Number of shares (m) 426.0EBITDA 338.8 219.3 -35.3% 262.0 19.5% 267.9 2.3% MC (current price) 2 083.1EBITDA margin 37.3% 25.0% 27.0% 24.6% EV (current price) 1 886.1EBIT 90.3 -29.6 16.8 27.5 63.7% Free float 100.0%Net profit 59.0 -64.2 -53.1 -50.6

P/E 35.3 Price change: 1 month 1.2%P/CE 6.8 10.6 10.8 11.0 Price change: 6 month 17.0%P/BV 0.9 0.8 0.9 0.9 Price change: 12 month -10.3%EV/EBITDA 5.3 8.2 7.5 7.0 Max (52 w eek) 5.7Dyield (%) 7.6 2.6 1.5 1.5 Min (52 w eek) 4.2

Netia (Sell)Current price: PLN 4.9 Target price: PLN 3.8

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Netia WIG

We expect P4 to make its market launch in late March/early April. On the one hand, the resulting media buzz might boost investor moods, but investors should keep in mind that the P4 debut marks the start of a period of much deeper losses than Netia has reported to date on its mobile telephony project. We still think that P4 will be a flop. The next few weeks will show whether we are right. We are reiterating our negative rating on Netia. Weak Q4 We expect Netia’s operating profit to come close to the level recorded for Q3 2006. Like all other telecoms, Netia is feeling revenue and margin erosion in its POTS business which ac-counts for over half of its revenues. The operator did not carry out any projects in the fourth quarter of 2006 that could have impacted sales in a major way (BSA was launched in Q1 2007, Wi-Max sales reduction). The EBITDA margin will stay below 25%, close to the full-year aver-age. The net profit is hard to estimate for several reasons. First, Netia will recognize one-time income from waived license payments (ca. PLN 15m), which will add to profit. On the other hand, P4, which is advance in its market launch preparations, will probably post a larger loss. Netia’s share in P4’s loss in Q3 was PLN 14m. This amount will increase to PLN 25m in Q4. Additionally, an impairment test will lead to ca. PLN 40m write-offs. Note that our estimates have a wide margin of error. P4 to partner with Germanos? Novator stays. Germanos, the distributor of Era and Orange products, will be P4 partner. It operates 200 stores countrywide. It would probably become P4’s strategic partner. Having in place a distribution business is the prerequisite for market entry, hence, the Germanos/P4 alliance does not sur-prise us. P4 had not spoken about its handset sales plans at all before. This might be an inter-esting move, but it does not change the fact that launch of a mobile telephony business will be a costly exercise. Novator denies any talks about divesting Netia and P4. We consider this bad news as it means that there is not much chance that Netia will gain a strong industry investor. Plans of P4 P4 wants to extend its number of base stations to 1500 at the end of 2007. Currently P4 has only several stations. Company’s Management Board announced the commercial start of the operator at the end of March 2007. Currently the network is being tested, however it does not include the new 3G services such as video conferences and TV. P4 plans to be cover Warsaw and Three-City at the beginning of its activity. At the end of 2007, P4 expects to cover 20% of Polish population. In mid February there will be chosen the brand at which P4 will offer its ser-vices. P4 launches services almost 1.5 year after gaining the frequency. But what will be P4’s competitive advantage, if it has network in two cities, while the competition is fierce and the market almost saturated? We believe that P4, at least at the beginning, will be not much differ-ent than MVNO. Netia has new CEO Mirosław Godlewski was appointed the new CEO of Netia. From January 2006, Mr. Godlewski was CEO of Opoczno SA, and before that, for three years, he headed Dec, Poland’s largest owner of railroad tank cars, member of the US GATX group. Even earlier, he was Managing Director at PepsiCo Trading. The new CEO’s main advantages are his experience in working for large corporations, and his track record in sales and marketing. However, he lacks knowledge about the telecommunications market, which means that the adoption by Netia of the new strat-egy might be delayed. Time is of essence as competition becomes more and more heated in Polish telecommunications. Also, we anticipate that the company will want to set right its open-ing balance, probably by recognizing impairment losses at the end of FY2006.

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Netia’s broadband offer Netia launched sales of broadband access services to individual fixed-line clients connected via TPSA. For now, the promotion is available in18 numbering zones. Netia’s prices are 11% lower than for TPSA’s “Neostrada” service. Clients can either buy modems for PLN 1.22 gross, or, if they decide to use their own modems, they will get a 90% subscription discount for the first bill-ing period. What is more, there are no data transfer limits. We predict that Netia will acquire 80,000 broadband clients this year, which will contribute to the estimated 10% growth in its revenues (the main driver being the consolidation of ProFuturo’s earnings). Netia is the first operator to offer bitstream access to retail users. At the turn of Q1, other operators are expected to follow suit. We anticipate a considerable increase in competition, leading to tighter margins. This is good news for Netia.

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5 February 2007 34



(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 18 342.0 18 568.5 1.2% 17 871.2 -3.8% 17 892.6 0.1% Number of shares (m) 1 400.0EBITDA 7 992.0 7 924.5 -0.8% 7 267.0 -8.3% 7 427.4 2.2% MC (current price) 37 086.0EBITDA margin 43.6% 42.7% 40.7% 41.5% EV (current price) 45 869.0EBIT 3 781.0 3 688.8 -2.4% 3 166.1 -14.2% 3 470.5 9.6% Free f loat 46.0%Net profit 2 316.0 2 179.3 -5.9% 1 841.9 -15.5% 2 169.9 17.8%

P/E 16.0 17.0 20.1 17.1 Price change: 1 month 9.5%P/CE 5.7 5.8 6.2 6.1 Price change: 6 month 29.9%P/BV 2.1 2.0 2.0 2.0 Price change: 12 month 16.7%EV/EBITDA 5.6 5.5 5.9 5.6 Max (52 w eek) 26.7Dyield (%) 1.2 3.8 5.9 6.0 Min (52 w eek) 18.2

TP SA (Reduce)Current price: PLN 26.5 Target price: PLN 20.6

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TPSA WIG

TPSA’s Q4 net profit fell short of our expectations (PLN 470m) and analysts’ consensus (PLN 555m). Management will recommend to allocate PLN 2.66 billion to dividends for shareholders (PLN 1.96bn, PLN 1.4/share), and, most probably, a share buyback (PLN 0.7bn, PLN 0.5/share, meaning a buyback of 27 million shares at the current price) in the second half of the year. At the current prices, such profit distribution implies a gross yield of 7.4% (5.4% for dividends). TPSA’s Management project that consolidated reve-nues in FY2007 will edge down 1%, and the EBITDA margin will amount to 42%-44%. The dividends and buy-back plans will keep TPSA’s stock price from falling until they are effected. All this does not change the fact that the group’s EBIT, still undefeated in fixed-line telephony and in the fast-growing mobile market, is almost PLN 500m lower than the year before (also charged with high allowanced). FY2007 will be marked by much more intense competition, both in mobile (P4, another MTR cut), and fixed-line telephony (WLR, BA, RIO). We stand by our view that now is the time to reduce investments in TPSA. Earnings summary TPSA’s 4Q 2006 revenues were flat from the Q4 2005, at PLN 4.686 billion. Q4 EBIT amounted to PLN 684m versus PLN 612m the year before. The operator recognized high allowanced both in Q4’05 and Q4’06. In line with expectations, in Q4’06 the company recognized an allowance against severance pays for employees leaving as part of a mutual agreement (5 700 max) in the amount of PLN 277m (PLN 262m net). The Q4’05 allowance against claims and disputes was PLN 368m. Adjusted for those allowances, the Q4’06 EBIT was down PLN 34m on a YoY basis. The bottom line ended at PLN 381m vs. PLN 484m in the corresponding period of FY2005. Such a big difference despite similar EBIT figures was because of the tax refund that TPSA received in Q4 2005 (+PLN 44m), versus a PLN 134m tax payment in Q4’06. The FY2006 EBIT generated by the TPSA group fell short of the FY2005 figure by PLN 460m. Because finance costs fell (debt reduction) from PLN 946m to PLN 733m, the full-year profit amounted to PLN 2 094 million versus PLN 2 520 million the year before. Users and revenues by segment Consolidated revenues remained on the level of last year, which is a very good result. Despite a reduction in mobile termination rates (MTR), revenues generated by the Mobile business (Centertel excl. inter-company sales) increased 13.5% (4Q/4Q), offsetting the 24.6% YoY de-cline in fixed-line revenues. As expected, competition did not yet have a visible impact on fixed-line revenues (Tele2 started to connect users on January 8th, and, so far, has managed to snatch 180,000 active accounts from TPSA). The competition impact will become evident in Q1 2007. The number of broadband users increased by 560,000 (150,000 people are already using the “Livebox”), driving Broadband revenues by 8.7%, i.e. PLN 90m YoY. The Broadband busi-ness has also not felt the impact of stronger competition yet, but this will change as of 1Q 2007 (Netia, GTS Energis). Competition will be heating up in both lines of business in the coming quarters as new operators emerge on the market. The number of fixed-line subscribers plunged by 478,000 in 2006. In Q4 2006, Centertel boosted its subscriber base by 783,000 to 12.52 million active SIM cards. In spite of this, its revenues fell from quarter to quarter due to MTR cuts leading to lower ARPU (-9,3% Q/Q; -11,5% Y/Y), which will continue to affect the operator’s revenue growth going for-ward. It is worth stressing that, while the sales revenues in FY2006 surged by PLN 1.1 billion, the EBIT generated by mobile telephony only edged up PLN 226m.

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Investments and CF Like in FY2005, TPSA invested PLN billion in FY2006, i.e. 16.1% of its consolidated revenues. 80% of that amount went to broadband and mobile development. The operator maintained the high level of FCF recorded in 2005 (PLN 4.2 billion). What is more, TPSA reclassified some of its real state from “PP&E” to “assets held for sale”. The reclassified real estate is worth PLN 425m, and might impact the level of available cash in 2006. Net debt at year-end FY2006 ex-cluding hedges amounted PLN 7.119 billion. Score one for TPSA The European Commission vetoed UKE’s ruling concerning call origination in TPSA's network. The Commission questioned the UKE’s interference with internet access prices. The UKE’s ruling mainly focused on call origination rates charged by TPSA from alternative operators. The Commission questioned the definition of the call origination markets as unjustly including net-work access for broadband purposes. Regardless of the Commission’s decision, TPSA will be fined for failing to separate subscription fees and Neostrada. According to the UKE, TPSA vio-lated several provisions of the Telecommunications Law. The fine decision will be issued after, not before 15th January as previously promised by the UKE’s President. The European Com-mission’s stance on the issue has dealt a severe blow to UKE’s standing in its fight against TPSA. Even though it only concerns one of many cases pending, it has undermined the belief that the regulator is always right. Each new ruling by the UKE will meet with investor disbelief as to whether it can actually be brought into affect. In light of the Commission’s decision, the deter-mination of the Regulator to fine TPSA also seems unjustified. But we cannot lose sigh of the big picture: the UKE has won several cases against TPSA, and its decisions have been effec-tively put into force on several markets. We did not take into account the impact of the subscrip-tion/Neostrada split in our valuation model. TPSA upgrades Internet access services TPSA is changing its broadband access offer, by allowing unlimited data transfers and increas-ing speed. All for the same price. This is a response to the competition who are offering much better technical capacity for less money (-11%). Notice that, for now, TPSA is also battling two broadband rivals (Netia and GTS Energis, both launched in mid-January). 5-6 new players will emerge in the first half of the year, including Polkomtel, Tele2, Dialog. Such heated competition cannot be without impact on margins and revenues. TP to lower fixed-line call rates TPSA’s CEO announced that the operator would cut fixed-line call prices in 2007 to reinforce its competitive position. This could be expected. Call prices are bound to continue on their down-trend, among others due to the growing popularity of VoIP telephony which can save callers up to 70-80% of the charges they pay for their POTS. An increase in broadband access penetra-tion will further accelerate the price slippage. Revenues generated from fixed-line voice traffic plunged 24% in Q4 and will continue to decline over the coming quarters.

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5 February 2007 36


Media Newspaper sales in December Gazeta Wyborcza (“GW”) achieved excellent average daily sales in December of 480.5 thou-sand copies. This was 19% more than in December 2005. December was also successful for Polskapresse, editor of local papers, which upped sales by 12%. Rzeczpospolita was the weak-est among national dailies, with sales plunging 16%. Tabloid sales also took a dip: Fakt was down 2.1%, and SuperExpress shed 4.9%. The sales of Dziennik rose to 211.6 thousand cop-ies relative to November (198,000 copies). GW has been successfully defending its market share, and should improve its advertising revenues in 2007. The Q4 2006 earnings figures will show at what cost the paper managed to increase its sales, giving us enough information to asses copy sales. January viewership TVN’s viewership in January 2006 stood at 15.6%, flat from a year ago. The station’s share in the prime time audience fell to 26% from 28.4% in January 2006. Polsat’s January audience share was 16% versus 15.8% a year ago. TVP1 owned 24.8% of the market versus 25.6% in January 2005, and TVP2’s market share was 19.8% vs. 21.4% a year ago. TVN 24’s 24-hour viewership increased to 2.6% vs. 1.8% in January 2005, and TVN 7’s edged up 1.4% compared to 1.3% a year ago. The fact that TVN’s prima time viewership decreased in January is no rea-son for concern. It was only one month, and one which usually generates low advertising reve-nues. The crucial viewership numbers will be those for March/April – a period of accumulation of advertising expenses. Era to keep its name for now Deutsche Telekom might consider itself to be the owner of a 97% stake in PTC, but it cannot decide to rebrand Era to T-Mobile until its ownership title is officially acknowledged. The issue is that Poland has still not acknowledged the validity of a ruling by the Vienna Court of Arbitration that is key to establishing who has ownership interests in PTC for which DT has been battling the French Vivendi and its subsidiary. It is hard to tell if we will see a resolution still in 2007. From a business point of view, the conflict between shareholders has a waning effect on PTC (DT is in charge). A no-rebranding decision might influence the advertising market. The re-branding expenses would be some PLN 100m, accounting for 1.4% of total advertising ex-penses estimated for 2007 (market: Forecast by BRE Bank Securities TV Puls to be more commercial TV Puls received clearance from the National Broadcasting Council (KRRiT) to amend its li-cense terms, and specifically to strike the clause establishing it as a Christian/Catholic program-ming station. News Corp is dedicated to moving the station out of its niche. The experience and cash resources of the media giant will probably make TV Puls into a significant market player. Its ratings are currently a puny 0.5%. The target for this year is to reach 2%. In the long term, TV Puls will be a risk to TVN. Polsat IPO to take place by the end of 2008 According to a statement by Polsat’s owner, the broadcaster is going to debut on the WSE by the end of 2008, in line with the investment agreement signed by Axel Springer. The German buyer is about to complete a due diligence audit, and will soon take over the 25% stake in Pol-sat. As we mentioned before, this is a risk for TVN. In our opinion, Polsat will not make it to the market before 2008 (earlier, its focus will be to improve financial performance and ratings). TVN will continue to grow amidst weak competition (Polsat and TV Puls will introduce programming changes in mid-2007, potentially increasing audiences) and a robust advertising market for an-other six months.

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(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 1 202.1 1 148.6 -4.5% 1 147.7 -0.1% 1 212.8 5.7% Number of shares (m) 56.8EBITDA 252.1 113.6 -54.9% 152.4 34.2% 175.9 15.4% MC (current price) 2 213.0EBITDA margin 21.0% 9.9% 13.3% 14.5% EV (current price) 2 061.2EBIT 157.9 38.1 -75.9% 78.7 106.6% 103.8 31.8% Free float 37.0%Net profit 125.0 29.4 -76.5% 68.6 133.6% 89.4 30.4%

P/E 17.7 73.0 31.2 24.0 Price change: 1 month 2.6%P/CE 10.1 20.4 15.1 13.3 Price change: 6 month 30.4%P/BV 2.0 1.9 1.9 1.9 Price change: 12 month -38.1%EV/EBITDA 8.4 17.6 13.1 11.2 Max (52 w eek) 63.0Dyield (%) 6.9 1.3 3.5 3.2 Min (52 w eek) 27.7

Agora (Accumulate)Current price: PLN 39 Target price: PLN 41.6

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Agora WIG

The most recent newspaper readership and sales data confirm that Gazeta Wyborcza manages to successfully defend its market position. As new telecom operators enter the market, and car sales improve, we expect that the industries that were responsible for the print-ad spend slump in 2006 will improve in 2007, and predict that print advertising will grow faster than other media. We are reiterating our positive rating on Agora’s stock. Good Q4 The fourth quarter should bring a considerable improvement relative to the third quarter which was marked by a slump in the advertising market. We predict that industries that disappointed as advertisers in the first three quarters, including telecoms and car manufacturers, stepped up spending in Q4, boosting the advertising revenues of Gazeta Wyborcza (+5,3%). Agora’s con-solidated sales will be lower than a year earlier due to lower sales of Gazeta Wyborcza (-PLN 24m) and books (-PLN 14m). Other business segments increased sales: newspapers by 6%, AMS by 15%, radio by 7%. Operating profit figures will be flat from Q4 2005. As a reminder, Agora posted a PLN 23m loss in Q4 2005 incurred on the Nowy Dzień flop. In Q4 2006, the Gazeta Wyborcza price slash will have a similar negative impact. Another nationwide daily? Point Group is planning to conduct a secondary stock offering at the turn of 2007 to finance its project to create a new nationwide daily (PLN 15-45m). The company has not revealed any specifics regarding the daily’s target, or any other details. In December, Point Group merged with the public company Arksteel, thus also becoming a stock exchange-listed company. The merged entity was named Platforma Mediowa Point Gruop. Even a tycoon like Axel Springer launched its nationwide broadsheet with many problems and at very high promotional costs. In our opinion, Point Group’s project, if it sees the light of day at all, will be a spectacular flop like the much-advertised “Życie”, or the M. Sołowow’s project in the past. Metro’s main rival Metropol goes out of business Metro international issued a press release announcing the closing down of Metro Poland, editor of the free newspaper Metropol. Metropol is the main rival to Metro, the free newspaper distrib-uted by Agora. The average daily circulation of Metropol is ca. 300,000 copies, while Metro’s is over 500,000 copies. Metropol’s share in the print-media advertising market after three quarters stood at 1.6%, while Metro’s market share was ca. 2%. Metropol’s annual (FY2006) revenues are an estimated PLN 25m. Based on those numbers, Metropol was the #2 free urban daily in terms of circulation and advertising market share. The Number One spot was occupied by Metro, while Echo Miasta is the third. The fact that Metropol is closing shop is a surprising, but great news for Agora which we did not take into account in the rating. Assuming for the sake of simplicity that Metro will rake up 25% of Metropol’s sales, PLN 0.5 per share should be added to the valuation of Agora’s stock.

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5 February 2007 38


IT Sector 2007-2010 Virtual State Plan The Ministry of the Interior and Administration (MSWiA) revealed its Virtual State Plan for the years 2007 to 2010 that appropriates PLN 2.5bn for public administration computerisation. Ma-jor IT projects include e-Deklaracje, e-Podatki, and PESEL II. The final version of the plan in-cludes among others the electronic platform for health service (estimated expenditure at PLN 660m in 2007-2010), IT cadaster system (PLN 190m) and digital IDs (PLN 400m in 2008-2013). We believe that this plan can accelerate the investments in public sector. We expect, however, that the biggest tenders will be started yet in H2 2007.

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Analyst: Andrzej LisLast Recommendation: 2007-01-08

(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 407.3 262.0 -35.7% 379.1 44.7% 404.9 6.8% Number of shares (m) 64.4EBITDA 22.6 31.0 37.2% 37.0 19.3% 43.6 17.7% MC (current price) 538.8EBITDA margin 5.6% 11.8% 9.8% 10.8% EV (current price) 448.1EBIT 14.5 25.8 78.2% 31.4 21.7% 37.2 18.6% Free float 43.7%Net profit 22.8 25.1 10.0% 27.4 9.3% 32.6 18.9%

P/E 23.6 53.0 22.4 15.8 Price change: 1 month 8.6%P/CE 17.4 34.9 16.9 12.6 Price change: 6 month -1.6%P/BV 2.9 2.7 1.7 1.6 Price change: 12 month -15.6%EV/EBITDA 20.6 27.8 12.4 9.1 Max (52 w eek) 10.0Dyield (%) 0.0 0.8 0.9 1.3 Min (52 w eek) 6.7

ABG Ster-Projekt (Hold)Current price: PLN 8.4 Target price: PLN 7.87

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ABG WIG

The headline story for the coming month will be ABG Ster-Projekt’s merger with Spin. The Merger Plan is set to be released by the end of February. We do not expect it to con-tain major changes with respect to the exchange ratio (4.41 shares of ABG Ster-Projekt for 1 share of Spin), but the structure of the transaction might have changed (e.g. the recently acquired Radcomp might be included in the integration). We are reiterating our HOLD rating. New contracts ABG Ster-Projekt won a hardware contract from Telekomunikacja Polska SA for software deliv-ery. The contract price is PLN 2.7m (net). The company disclosed that the cumulative value of all of its contracts from TPSA over the last 12 months has amounted to PLN 21m. ABG Ster-Projekt, currently implementing a system for Romania’s Paying and Intervention Agency for Agriculture in consortium with the Romanian company Siveco, signed an annex for GIS data migration and development of a complementary direct payment processing module. The annex is worth EUR 1.9m.

* FY2006 earnings adjusted for real-estate sale (PLN 8m) and reversal of a tax allowance (PLN 6m), FY2007-FY2008 multiples estimated based on pro-forma financial statements of the merged Spin and ABG Ster-Projekt

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5 February 2007 40



(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 539.2 501.2 -7.1% 1 227.6 144.9% 1 308.6 6.6% Number of shares (m) 25.2EBITDA 48.3 64.2 33.1% 168.0 161.6% 184.0 9.5% MC (current price) 1 604.9EBITDA margin 9.0% 12.8% 13.7% 14.1% EV (current price) 1 524.8EBIT 38.2 50.2 31.5% 139.0 177.1% 154.2 11.0% Free float 65.7%Net profit 30.8 64.5 109.5% 114.6 77.7% 127.8 11.6%


Asseco Poland (Reduce)Current price: PLN 63.8 Target price: PLN 49.14

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Asseco Poland WIG

Expectations of strong Q4’06 figures and further acquisitions in Poland and abroad are keeping investors upbeat on Asseco Poland. However, because we think that the current price of Asseco Poland’s stock more than discounts the growth opportunities lying ahead of the company, and that the premium attached to it relative to local peers is too high, we are reiterating our REDUCE rating on the stock. ING TFI trims equity interest After the Asseco Poland’s merger with Softbank, the number of shares held by all of ING TFI’s investment funds fell below 10% of the voting power. Before, ING TFI’s finds held 391,566 shares of Asseco Poland (10.17% of equity and votes), and 1,844,340 shares of Softbank (7.33% of equity and votes). At the date of the merger, the ING TFI funds held a total of 4,154,579 shares of Asseco Poland, accounting for 9.01% of equity and votes. PVT to debut on the WSE still this year PVT, a Czech subsidiary of the Asseco group, might float its shares on the Warsaw Stock Ex-change still this year. PVT, soon to be renamed to Asseco Czech Republic, is currently in talks with three potential Czech IT acquirees which should end still in Q1’07. In 2006, PVT generated ca. PLN 155m in revenues and PLN 7m in profit. This year’s targets are PLN 170m for the top line and PLN 15m for the bottom line.

* FY2006 multiples based on earnings adjusted for Asseco Poland stock options (PLN 3.9m), divestment of Mediabank (PLN 4.1m), goodwill write-off on S2Koma (PLN 4.8m), and net profit of the “old” Asseco Poland accounted for by the equity method (PLN 12m), FY2007-FY2008 multiples estimated based on pro-forma consolidated financial statements of the “new” Asseco Poland, including subsidiary earnings consolidated on a pro-rata basis

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(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 444.0 455.0 2.5% 579.0 27.3% 675.7 16.7% Number of shares (m) 7.5EBITDA 38.6 57.6 49.0% 76.5 32.9% 95.0 24.2% MC (current price) 1 742.9EBITDA margin 8.7% 12.7% 13.2% 14.1% EV (current price) 1 713.8EBIT 27.4 45.5 66.3% 63.7 40.0% 81.1 27.3% Free float 56.9%Net profit 28.1 50.0 78.2% 63.7 27.5% 81.7 28.2%


ComArch (Reduce)Current price: PLN 231.8 Target price: PLN 185.8

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Comarch WIG

We expect ComArch to post strong Q4’06 earnings results (report is scheduled for March 1st), which, however, are already factored in investor expectations. We would like to point out the strong upward pressure on salaries which might affect ComArch, with its increasing staff numbers, more than other IT companies in the quarters ahead. We are downgrading our rating from Hold to REDUCE. New contracts ComArch won a contract for a management support system from the University of Szczecin. The contract price is PLN 0.7m (net). ComArch signed a contract with T-Mobile International, a member of Deutsche Telekom. The job is a trial rollout of Comarch’s “Inventory Management” solution which will support the opera-tor’s telecommunications assets and data communications services. The rollout will be carried out at T-Mobile Germany and T-Mobile Austria. If the trial is successful, the system will be im-plemented at other T-Mobile foreign locations. The contract value was not disclosed. ComArch sold its ERP system, the “CDN XL,” to three foreign customers, including two compa-nies from Germany and one from Slovakia. The prices of the contracts were not disclosed. CEO interview Filipiakiem In an interview for Parkiet, ComArch’s CEO Mr. Filipiak says that the FY2006 guidance pegging revenues at PLN 455m and net profit at PLN 50m will be slightly exceeded. The contract back-log for 2007 is 35%-40% higher than a year ago, the sales growth target is at least 20%. Co-mArch’s priority will be to maintain its net profit margin (9% in FY2006). The CEO also pointed to the fast-growing staff headcount (which increased by almost 670 people in 2006, i.e. by 37%) which drives salary costs. He expects the salary expectations to continue to increase. ComArch is currently in negotiations with several global prospects, and expects to land some contracts still in Q1’07. ComArch is not going to sell its equity stake in Interia, on the contrary, the CEO would be glad to see that stake increased. We think that all those plans are already factored in investor expectations. Our FY2007 estimates include PLN 579m in revenues (up 27% YoY), and PLN 63.7m in EBIT (up 40% YoY), implying an operating margin of 11%. As a reminder, the company is still running its management incentive scheme, and will issue ca. 430 thousand new shares at the issue price of PLN 1 for its executives in the first half of the year. SB member sells shares On January 17th, a member of ComArch’s Supervisory Board sold 10 thousand shares of the company’s stock at PLN 222 apiece. It was probably Ms. E. Filipiak, who owns 3.2 million Co-mArch shares jointly with Mr. J. Filipiak. Given the size of her interests, the sale was not signifi-cant.

* multiples estimated based on earnings adjusted for a deferred tax asset, gains from sale of Interia shares, and profits of subsidiaries accounted for by the equity method (Interia)

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5 February 2007 42



(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 858.1 814.4 -5.1% 1 315.4 61.5% 1 394.2 6.0% Number of shares (m) 6.9EBITDA 55.8 39.6 -29.0% 116.6 194.4% 145.9 25.1% MC (current price) 817.3EBITDA margin 6.5% 4.9% 8.9% 10.5% EV (current price) 722.2EBIT 34.1 17.3 -49.2% 85.0 390.7% 113.6 33.6% Free float 79.9%Net profit 11.5 2.8 -75.6% 65.2 2234.3% 88.7 36.1%


ComputerLand (Hold)Current price: PLN 118.5 Target price: PLN 114.8

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Computerland WIG

After a recent revision to the FY2006 earnings guidance, we do not expect any more un-welcome surprises from ComputerLand. We are afraid that, if the company once again fails to deliver on its earnings promises in Q4’06, investors will be prompted to think twice about whether they believe in the much-advertised benefits of the CoLorado pro-ject and synergies achievable on the merger with Emax. Because ComputerLand’s stock has gone up 20% since our last rating and reached our price target, we are lowering our rating from Accumulate to HOLD. New contracts Emax’s subsidiary Winuel won a PLN 0.8m (net) contract from the Ministry of Justice for service and support for the Central Prosecution Database (CBD SIP) and the PESEL database replica. The contract term runs from January 1st, 2007 to December 31st, 2009. Emax won a contract for an electronic bill presentment and payment platform for the KIR. The price is PLN 7.2m and covers five-year maintenance. Emax signed a license agreement with a finance company for Printscope software used to con-trol and streamline printing costs. The license was granted for 2 years. The net value of the con-tract is PLN 2m. A consortium of Winuel (Emax’ subsidiary) and Capgemini won a contract from the General Directorate for National Roads and Motorways (GDDKiA) for implementation of a SAP ERP system. The contract value is PLN 9m, and its term is 22 months. ComputerLand signed a deal with Grupo Santander, for advice and support in implementation of IT project in Russia and Poland. The deadline was set at 31st March 2008 and the value was not disclosed. ComputerLand signed a contract with the General Police Headquarters for an upgrade of a mo-bile database access system. The contract's deadline is April, and its value is PLN 3m. ComputerLand’s subsidiary ComputerLand Serwis, in consortium with SAD, won a contract from the Ministry of Education (MEN) for installation of Macintosh computers at schools. The award is worth PLN 37.8m. This is the first award by the MEN in over six months. The MEN is currently holding two more tenders for a total PLN 300m. We expect awards still in Q1. The contracts, though sizeable, have a profitability of 2%-3%. CSBI, a Russian company in which ComputerLand holds a 25% stake, implemented its “Bankier” system at the Agroros bank. The contract price was not disclosed. Management reiterates 2006 guidance ComputerLand revised its H2’06 net profit guidance down from PLN 20m to PLN 17m. The new guidance does not factor in the consolidated earnings of the Emax group. The new H2’06 profit target is 15% lower than originally. This is bad news, especially in light of earlier promises that the previous targets would be achieved. Board member sells shares On January 11th a member of management board sold 20,000 shares at PLN 125 per share.

**** FY2007-FY2008 multiples estimated based on pro-forma financial statements of the merged ComputerLand and Emax

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Equity raise Emax’s Management Board resolved to raise the company’s equity within the authorized capital cap by issuing 1 to 76 000 shares of ex-rights “F” stock with a nominal value of PLN 1 each. The shares comprising the raised equity will be offered to Emax employees as part of the 2005 Management Stock Option Plan. The offering price of the “F” shares will range from PLN 85.81 to PLN 116. 41 per share, depending on the Management’s performance. Earnings deterioration Emax’s CEO said in an interview for Parkiet that the company’s FY2006 net profit would total several million zlotys PLN, much below the FY2005 figure of over PLN 20 million. The full-year profit was affected by the postponement of another stage of a contract carried out for the Polish Post Office, originally scheduled to start in October 2006. Earnings were further depressed by the lack of new contracts from the public sector and utilities which generate a large portion of the company’s revenues. The company had warned earlier that it would not repeat last year’s bottom line performance. In our opinion, the weak earnings expectations have already been discounted by investors who are now looking forward to an improvement, first, on the back of the expected market rally, and, second, thanks to Emax’s upcoming merger with Computer-Land.

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Macrologic WIG


(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 32.6 39.7 21.9% 46.0 15.9% 52.9 15.0% Number of shares (m) 1.9EBITDA 8.1 9.4 16.8% 10.6 12.6% 12.3 15.2% MC (current price) 88.8EBITDA margin 24.9% 23.8% 23.1% 23.2% EV (current price) 84.8EBIT 5.0 6.4 28.6% 7.3 12.7% 8.8 20.7% Free float 29.8%Net profit 3.7 5.0 33.1% 5.6 12.9% 6.8 21.2%


Macrologic (Accumulate)Current price: PLN 47 Target price: PLN 51.81

We expect that Macrologic’s Q4’06 earnings report (Feb. 12th) will show an improvement in revenues (+14% YoY) and a decline in EBIT (-1% YoY) and net profit (-9% YoY). On a year-over-year basis, revenues will be 18% higher, EBIT will go up 17%,and the bottom line will surge 21%. We believe that Macrologic’s revenues might gain over 15% this year relative to FY2006, on the back of proprietary product implementations and reorganiza-tion of the sales network. Offsetting the upward pressure on salaries, growing contract prices will reflect positively on profitability. Because the price of Macrologic’s stock has increased 15% since our last rating, we are downgrading from Buy to ACCUMULATE. Stock trading Macrologic sold 76,7 thousand shares of treasury stock for an average PLN 41.3/share. In ac-cordance with the June 19th Resolution by shareholders, the shares were offered to selected Macrologic employees. In addition, Macrologic insiders bought a total of 65.5 thousand shares at PLN 41.3-44.71 per share and sold a total of 33 thousand shares at PLN 48-49 apiece.

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Prokom Software WIG


(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 1 854.8 1 681.7 -9.3% 2 401.0 42.8% 2 533.4 5.5% Number of shares (m) 13.9EBITDA 226.2 205.6 -9.1% 362.4 76.3% 405.8 12.0% MC (current price) 2 292.0EBITDA margin 12.2% 12.2% 15.1% 16.0% EV (current price) 2 381.6EBIT 151.1 146.6 -3.0% 270.5 84.5% 311.5 15.1% Free float 78.5%Net profit 80.3 80.5 0.2% 111.2 38.1% 132.5 19.2%


Prokom Software (Hold)Current price: PLN 165 Target price: PLN 150.3

We stand by our belief that Prokom Software is the best-positioned among IT companies to capitalize on the upcoming upswing in public-sector IT spending. We expect the first major contract awards in the second half of the year, but the market has already dis-counted the company’s growth potential. Prokom Software’s stock rallied ca. 25% since the beginning of the year, and we think it does not offer any more upside. We are down-grading our rating from Accumulate to HOLD. New contracts A consortium of Spin and Comp signed another data communications upgrade contract with the Border Guard Service for PLN 3.1m (net) . The combined net value of the two contracts signed recently with the Border Guard Service is PLN 18.9m. ING TFI reduces interest The investment fund “ING Towarzystwo Funduszy Inwestycyjnych S.A.” reduced its exposure to Prokom Software from 737.5 thousand shares (5.04% of votes) to 664.7 thousand shares (4.79% of votes). Comp revised 2006 guidance Comp revised its FY2006 earnings guidance. The original revenue and profit targets were PLN 185m and PLN 15m respectively. The new targets are PLN 130m and PLN 14m respectively. The downward revision to the revenue target was due to delays in several government con-tracts. Letter of Intent to merge with CSS Comp signed a Letter of Intent to merge with CSS. All of CSS’s assets will be traded for Comp’s shares. The ballpark exchange ratio estimate is 0.3708 share of Com for one share of CSS. The merger will be finalized by the end of September. Related parties acquire Comp stock Comp reported that parties related to Mr. Tomasz Bogutyn, member of Comp’s Supervisory Board, acquired a combined 44 thousand shares of the company’s stock. According to the re-port, Party 1 acquired 26.15 thousand shares at PLN 80-85 apiece, Party 2 acquired 8 thousand shares at PLN 80-81 per share, and Party 3 acquired 10 thousand shares at PLN 85/share. The transactions took place between January 15th and 17th. J. Papaj sells shares Comp’s CEO Jacek Papaj sold a total of 160,000 shares during two block trades at PLN 90/share. As a result, Mr. Papaj now holds 1.04 million shares of Comp’s stock (37.82% of equity and votes). Shareholding agreement with Prokom Software On January 10th an agreement was signed between Comp SA, Prokom Software SA, and Ja-cek Papaj (Comp’s main shareholder and President), by virtue of which Prokom will take over control over Comp, establish a Prokom Software Systems Security Competence Center within its organization, and facilitate a merger between Comp and CSS. To that purpose, Comp will issue 528.75 thousand new “J” shares to Prokom Software at the issue price of PLN 80/share in exchange for an in-kind contribution of Safe Computing shares and rights in Prokom Software’s cryptography assets. Furthermore, Prokom Software undertook to acquire Mr. Papaj’s stake in Comp (10% minus one share) so as to reach the 30% voting threshold (not more than 32.9%). Such an acquisition will become binding if Comp’s Bylaws are amended to authorize sharehold-

* multiples estimated based subsidiary earnings consolidated on a pro-rata basis (Asseco Poland, ABG Ster-Projekt, Spin)

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ers with 30% voting rights to single-handedly appoint the majority of Supervisory Board mem-bers. If the Comp/CSS merger is not final by December 21st, 2007, Jacek Papaj will grant Pro-kom Software a CALL option on his 216,000 to 232,000 stake in Comp’s equity, depending on the number of shares acquired by Prokom Software under the “J” stock offering. The above-mentioned agreement expires automatically if Prokom Software SA does not take control over Comp by 30 June 2008. The previous investment agreement between Comp and Prokom Soft-ware has been amended to account for the former’s plans to merge with CSS. The goal of the merger, however, has not changed. Instead of the originally planned 40% voting rights, Prokom Software’s voting power will be 30%, but Comp’s Bylaws will also be amended to lower the vot-ing threshold authorizing appointment of the majority of Supervisory Board members to 30%.

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Techmex (Accumulate)Current price: PLN 25.3 Target price: PLN 27.96

We expect that Techmex traditionally generated the bulk of its full-year profits in the fourth quarter (report scheduled for March 1st). On a full-year basis, Techmex will not record much change in its revenues (+2% YoY), but EBIT and the bottom line will surge (42% and 74% respectively YoY) thanks to wider margins on GIS contracts. In the first half of the year, Techmex will probably debut Karen Notebook on the Warsaw Stock Ex-change. We are downgrading our rating from Buy to ACCUMULATE to account for the increase in the stock price. PPIM increases equity interest Pioneer Pekao Investment Management (PPIM) increased its equity interest in Techmex. It now holds 418.9 thousand shares representing 5.01% of the share capital and votes. Before, PPIM had 395.5 thousand shares (4.73% of equity). More Techmex in Karen Notebook Techmex increased its interests in Karen Notebook from 50% to 63% following a private place-ment of 8 million shares to Techmex and private individuals. Karen earned ca. PLN 6m on the private placement, plus, Techmex discharged all of its outstanding debt (ca. PLN 15m). The profits will be allocated, among others, to enlarge the sales network.

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Techmex WIG

* multiples estimated based on subsidiary Karen Notebook’s earnings consolidated on a pro-rata basis

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Metals

Sonami on copper, China increases demand Sonami, Chile’s National Mining Society, forecasts that copper output in 2007 will increase 5.6% (300,000 tons) to 5.65m tons. The average annual price of copper is projected at $2.5/lb, i.e. 6% below the current COMEX price. According to December data, cathode copper imports in December rose to 200,000 tons – the highest monthly level in 2006. In our opinion, demand from China will pick up after a weak 2006 (-6%). Note that the seasonal peak in world copper demand takes place in March and April, which should be reflected in the inventory levels on metal exchanges. We are reiterating our positive rating on KGHM. In the short term, however, we expect another price slippage on the LME, potentially affecting the company’s stock per-formance.

Copper inventories on COMEX, LME, Shanghai vs. copper price (spot) on LME

Source: LME, COMEX, SME

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(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 726.0 1 045.5 44.0% 1 046.7 0.1% 1 140.9 9.0% Number of shares (m) 9.2EBITDA 133.9 155.7 16.3% 199.0 27.8% 228.0 14.6% MC (current price) 1 824.0EBITDA margin 18.4% 14.9% 19.0% 20.0% EV (current price) 1 918.6EBIT 97.3 111.3 14.4% 152.8 37.3% 179.8 17.7% Free float 46.0%Net profit 89.4 87.7 -1.9% 120.1 37.0% 143.3 19.3%


Kęty (Hold)Current price: PLN 197.7 Target price: PLN 180.5

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Kęty WIG

The Kęty Group posted a net profit of PLN 87.7m for FY2006, which is flat from a year earlier, but still impressive given the production stoppage after the fire in the Flexible Packaging Segment at the beginning of last year. Our optimistic forecast for FY2007 is that the bottom line will reach PLN 120m, but, given the current price of Kęty’s stock, we are prompted to maintain our HOLD rating. Q4 earnings On a year-over-year basis, Kęty’s revenues soared 41%, EBITDA gained 28%, and net profit was up 27% in Q4’06. Such strong performance was achieved on high demand, especially from the construction industry, on the one hand, and rising prices of aluminum on the other hand (revenues). Earnings were further boosted by the incorporation of Aluprof in the financial state-ments. Further growth in Poland will be hampered by limited capacity: the Extruded Products Segment and the Flexible Packaging Segment work at 90%-95% of their capacity. In the first quarter of this year, Kęty will launch an extruded product factory in the Ukraine (15,000 tons), and add a new printer in its local factory, partially eliminating the bottleneck. But, to generate further growth, the company will have to increase its CAPEX. Kęty’s debt at the end of 2006 amounted to PLN 255m, i.e. 1.4x the ‘07EBITDA target. The profit target for this year is PLN 98m, which is only PLN 6m more than in 2004, when consoli-dated revenues totaled PLN 540m, and net debt stood at PLN 55m. But the investments fi-nanced through borrowings lead us to conclude that the profit growth will be stronger than pre-dicted by the company’s Management. We think that investors will be disappointed if the FY2007 earnings come just in-line with the guidance.

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(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 8 000.1 10 640.0 33.0% 9 436.5 -11.3% 8 596.4 -8.9% Number of shares (m) 200.0EBITDA 2 800.0 4 597.9 64.2% 3 651.3 -20.6% 3 065.8 -16.0% MC (current price) 17 600.0EBITDA margin 35.0% 43.2% 38.7% 35.7% EV (current price) 19 015.0EBIT 2 508.7 4 277.2 70.5% 3 270.1 -23.5% 2 644.6 -19.1% Free float 36.0%Net profit 2 289.4 3 773.8 64.8% 3 189.4 -15.5% 2 919.4 -8.5%

P/E 7.7 4.7 5.5 6.0 Price change: 1 month 10.8%P/CE 6.8 4.3 4.9 5.3 Price change: 6 month -23.5%P/BV 2.8 2.0 1.7 1.5 Price change: 12 month 19.4%EV/EBITDA 5.7 3.0 3.5 3.7 Max (52 w eek) 135.0Dyield (%) 2.3 6.3 10.3 9.1 Min (52 w eek) 67.8

KGHM (Accumulate)Current price: PLN 88 Target price: PLN 97

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KGHM WIG

The tremendous volatility in copper prices is affecting KGHM’s stock price. The key de-terminant of future copper price trends will be a rebuilding of the US real-estate market which remains in a slump despite growing GDP. As a result, inventories in US locations are increasing while prices are falling. Demand from China and other Asian countries is on the rise. We still believe that now is a good time to Accumulate KGHM’s stock as a mid-term investment. As for LME prices, it seems to us that the most probable scenario is one more setback to a level of ca. $5,000/T (a 50% retracement of the of the uptrend started in 2001), followed by market consolidation at this level. Lower volume, hedging KGHM will show a 20% QoQ slump in its earnings in Q4, caused mainly by the price slippage on the LME. The average price of copper in 3-month transactions amounted to 7038 USD/ton, i.e. 8.2% less than in Q3 2006. Another factor which eroded revenues were lower sales vol-umes, both for copper (133 thousand tons), and silver (253 tons). We assumed in our projec-tions that KGHM will not exceed its sales volume target for FY2006. Moreover, in H2’06, KGHM recorded higher sales volumes of copper (+10,000 tons/quarter) hedged at low prices (ca. $3,000/T). We expect the unit cost of production to amount to PLN 11,200/T in Q4, i.e. PLN 300 less than in Q3, due to a decline in the cost of scrap metal, partially offset by an increase in salaries (bonuses). Dividends from KGHM KGHM’s workers are threatening to go on strike if the State treasury decides to pay out high dividends from the company’s FY2006 profit. In a recent interview, the State Treasury Minister said that it expects all government-controlled companies to pay out 40-80% of their net profits. In case of KGHM, this means PLN 7.4-14.7 per share, implying a gross yield of 8.3%-16.6%. KGHM to buy LOT? According to unofficial information (Rzeczpospolita), KGHM will take over LOT’s shares from Swissair’s trustee in bankruptcy. The interest at stake is 25%. The terms of the acquisition are unknown. The estimated value of the stake is PLN 350m. KGHM is reportedly interested in it as a financial investment that might be divested in after several years. The concerns that KGHM would become involved in arrangements with the State Treasury for investments in financially distressed companies are proving accurate. This is an unwelcome development which might prompt investors to put an even higher premium to valuation. But we cannot make any definitive conclusions or assess the impact on KGHM's valuation before we learn the details of the acqui-sition. We cannot rule out that, under certain circumstances, the transaction might have a posi-tive impact on valuation.

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Koelner WIG


(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 241.3 411.8 70.7% 590.9 43.5% 734.3 24.3% Number of shares (m) 30.3EBITDA 45.9 71.1 54.9% 107.4 51.2% 127.6 18.8% MC (current price) 1 753.4EBITDA margin 19.0% 17.3% 18.2% 17.4% EV (current price) 1 858.4EBIT 34.3 54.3 58.3% 78.3 44.4% 91.8 17.2% Free float 37.0%Net profit 27.6 40.5 46.6% 61.9 52.8% 74.8 20.9%


Koelner (Hold)Current price: PLN 57.8 Target price: PLN 53.72

We are reiterating our PLN 53.72 price target (estimations factored in certain assump-tions about the Śrubex acquisition) and HOLD rating on Koelner. Stock performance in the near future will be largely determined by the success of the tender offer for out-standing Śrubex shares and acquisition details. We expect that once the merger process is complete, Koelner’s Management will provide more detailed information about the post-merger integration and energy benefits, and issue a revised earnings guidance. Based on this data, we will be able to review our valuation. Tender offer for Śrubex Contrary to earlier declarations, Koelner decided to hold a tender offer for the outstanding shares of Śrubex. Koelner wants to buy ca. 36% of the outstanding shares of the screw manu-facturer, and increase its equity interest to 66% (after settling its block purchase, its interest will already go up from 20% to 30%). The price offered to the other shareholders is the same as in the block trade: PLN 34.5. If the tender offer is successful, Koelner will offer its own shares to holders of the remaining 33% shares of Śrubex’s stock. The tender offer price is higher than paid by Koelner at the time it purchased a 20% stake in Śrubex early last year (PLN 30.1), which is no wonder as Śrubex’s shareholders deserve a premium for the controlling stake. In our January 29th Research, we estimated the price of one Śrubex share at ca. PLN 36, al-though we emphasize that this valuation is valid only with the assumption that Śrubex’s turn-around program is a success, and that its financial performance improves significantly in the next two years. However, Śrubex’s shareholders have to take into account the fact that the company will not generate notable profits until FY2008. Furthermore, if it is not incorporated into Koelner, the two companies will become direct competitors given the Koelner is planning to become actively involved in screw manufacturing. If the tender offer is a success, and is fol-lowed by a stock swap, the exchange ratio, assuming an unchanged valuation of Śrubexu and our estimated valuation of Koelnera (PLN 50/share), will be something like 0.7 shares of Koel-ner for one share of Śrubex.

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Construction Construction output in 2006 According to GUS, construction output in December 2006 was 17.9% higher than the year be-fore; seasonally adjusted, construction output was 26.0% higher than in December 2005. The full-year construction output was 17.5% than in 2005. As expected, December witnessed contin-ued robust growth in output owing to favorable weather conditions. Construction: Petchem in 2007 According to Puls Biznesu, the general contractor for Lotos’s Comprehensive Technical Up-grade Program will be selected in January. The total Program CAPEX is estimated at PLN 7bn. Candidates include Fluor and a Uhle/Technik consortium. Polimex-Mostostal and Energomon-taż Północ, scheduled to be incorporated into the Polimex group in the first quarter, might be get the subcontractor job. As mentioned in 2007 Strategy for the construction market, Lotos’s pro-ject is Poland’s largest petchem project aside from PKN Orlen’s scheduled for the next few years. Other construction companies that will potentially tap into the project’s subcontractor budget include Naftobudowa and Mostostal Płock. Construction: Another road developer The Greek company J&P Avax signed a EUR 213.5m contract for a 15.5km section of the A-1motorway from Sośnica to Bełk. 83% of the expenses will be covered from the EU Cohesion Fund. The total cost of the project is over EUR 242.7m. J&P Avax has been present in Poland for two years. Its increased activity will heat up the competition in the Polish market, and hold down the prices and margins on road contracts. Energomontaż Południe: PLN 1.1 issue price, EUR 1.4m contract The issue price of Energomontaż Południe’s new shares was set at PLN 1.1. Furthermore, the company signed a contract with EON Energie for welding work at the Infracor Power Plant for EUR 1.4m (ca. PLN 5m). The deadline is set at February 2008. A relatively small contract (ca. 2.5% of estimated FY2007 revenues). Energomontaż Południe: earnings forecast of real estate business The FY2007 top-line estimate for Wica Invest (real estate), Energomontaż Południe’s wholly owned subsidiary, is PLN 9.6-14.5m. The expected cumulative gross profit range for the Ener-gomontaż Południe group for FY2007 is PLN 19.0m to PLN 23.0m. Energomontaż Południe is going to pay out one-third of its profit as dividends to shareholders. The long-term profitability target is 7%-8%. The company’s contract backlog for 2007 is already 77% full, and is worth PLN 156m. The real-estate development business is expected to generate sales equal to 20%-25% of annual revenues. From 2007 to 2011, the company plans to build a housing estate and an office building complex in Katowice. The estimated value of the project is PLN 280m. Energo-montaż’s FY2007 profit will be generated mostly from the real-estate development business. However, the company will also work to improve the performance of its core business, energy engineering. Another one of its real estate projects scheduled for 2008-2010 is estimated to being PLN 100m. Instal Kraków: a PLN 3.5m deal Instal Kraków won a PLN 3.5m contract from MPWiK for a diagnostic center at the MPWiK base in Krakow. The deadline is set at September 2007. The total value of contracts awarded to In-stal Kraków by MPWiK over the past 12 months is PLN 7.1m. Instal Kraków: TFI PZU increases equity interest TFI PZU increased its interest in Instal Kraków’s share capital from 8.9% to 9.5% by acquiring 43 thousand shares. Instal Kraków: a PLN 19.4m deal Instal Kraków signed a contract with the municipal administration in Tarnobrzeg for moderniza-tion of the SUW Jeziórko water treatment plant. The contract value is EUR 4.99m (PLN 19.36m gross). Deadline is December 2008. This is a mid-sized contract (ca. 10% of cumulative four-quarter revenues) in the core line of business. Mostostal Export: partnership with Gant Mostostal Export signed a PLN 300m investment agreement with Gant for 1000-apartment pro-ject in Krakow. Mostostal Export will be the general contractor and contributor of land. The pro-ject will last 24 months. It will be managed by a joint SPV in which a Mostostal Export subsidiary will have a 49% equity interest, and Gant will have a 51% interest. A project is currently under-way in a similar location, but twice the size of the new one.

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Mostostal Export sued Mostostal Export was sued by Warsaw’s “Ursynów” District authorities for PLN 73.9m in con-tractual damages for delays in the construction of entertainment and sports facilities for Ur-synów's Sports and Recreation Center. The company says that the claim is groundless, and is going to prove that in court. The sports facilities were opened in 2005. Mostostal Export be-lieves that a fine that exceeds several times the contract value (ca. PLN 18m) is excessive and unjustified in light of the fact that a part of the fault for the delays lies with the investor. The com-pany stated that its financial statements as of FY2004 include a provision against the fine amount. Mostostal Płock: PLN 14.8 m annex Mostostal Płock signed an annex to a 2002 agreement for complete delivery of storage contain-ers as part of Stage 2 of the Radzionków Storage Facilities project. The net value of the annex is PLN 14.8m. This is a material contract (ca. 15% of annual revenues) in the company’s core business line. Mostostal Płock: PLN 9 m contracts From 06.12.2006 to 11.01.2007, Mostostal Płock signed agreements with Pfleiderer MDF worth a total of PLN 9m. The biggest deal, worth PLN 4.3m, is for construction, delivery and assembly of installation in production plant in Grajewo. Despite petrochemical sector, Mostostal Płock is an active participant of wood industry. The signed deals account for ca. 9% of company’s an-nual earnings. Mostostal Warszawa: PLN 22m property sale Mostostal Warszawa sold a Warsaw property (freehold rights in 15.9 thousand sq. m land and manufacturing and office facilities) for PLN 22m to a wholly-owned subsidiary of Acciona Nieruchomości. The land will house an office complex for which Mostostal Warszawa might be the general contractor. Naftobudowa: PLN 6.5m worth of deals Since October 2006, Naftobudowa has signed EUR 1.7m (PLN 6.5m) worth of contracts with GELDOF Metaalconstructie N.V. PBG: FY2007 guidance PBG published its FY2007 earnings guidance. Sales are projected at PLN 1.2bn, operating profit at PLN 118.1m, and the bottom line target is PLN 82.3m (+57% YoY). According to the company’s CEO, the guidance is conservative, and might be revised upward. The targets are based, among others, on the backlog of contracts set to be performed next year (over PLN 900m), and contracts expected to be won in 2007, and the margins expected on the different revenue groups. PBG is also meeting with its investors as it is preparing for a stock offering expected to bring over PLN 300m in profit. PBG’s profit target is close to the analysts’ consen-sus. . Polnord: Loans to finance new real estate projects Fadesa Prokom Polska, which is partly controlled by Polnord, signed a PLN 239m loan agree-ment. The financing will be allocated toward the first three stages of the “Ostoja Wilanów” hous-ing estate project covering a combined 55.4 thousand sqm of usable space. Furthermore, Pol-nord reported that it is build a housing estate with a combined 43.3 thousand sqm of usable space on a property it had purchased in Olsztyn. Polnord signed a PLN 30.5m agreement with the general contractor for the first stage of the project (10.4 thousand sqm). Prochem: Dispute with PERN Prochem received a response from PERN to the December 2006 claim for PLN 41.3m. PERN refused to pay and filed for Prochem’s claim to be dismissed, and at the same time filed a counter claim against Prochem for PLN 129.4m. Prochem declared this claim groundless, and will respond to it in accordance with the relevant procedure. This is a follow-up in the over-year-long dispute between the two companies concerning a contract for the third thread of the Ada-mowo-Płock pipeline. Prochem stated that it would not incur any additional costs under that contract and the counter claim should not change that. Projprzem: ING TFI reduces interest ING TFI reduced its holdings in Projprzem from 14.0 to 13.74%. Projprzem: Stock allocation and retirement of subsidiary shares 1.5 million shares were allocated as part of the cum-rights stock offering (the issue price is PLN 35). Projprzem earned over PLN 50m from the offering, which will be allocate toward acquisi-tions and further growth. The company also reported that the court had approved an equity re-duction at the subsidiary Zripol.

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Projprzem: PLN 15.6m real estate purchase contracts Projprzem purchased three parcels of land for residential in Bydgoszcz with a total area of 74.290, sqm for PLN 15.6m. Remak: PLN 11.6m deal Remak signed a contract with Rafako for an installation of 2 boilers for the purposes of the “EVI Europark” project in Emlichheim (Germany). The contract value is PLN 11.6m (EUR 3m). The contract deadline is set at October 2007. Remak’s contract backlog for 2007 is 75% full. The company is hoping to land more jobs from Polish and German power plants. The Rafako con-tract is a sizeable one, as it accounts for almost 9% of the company’s cumulative revenues for the last four quarters. ZREW: EUR 2m contract ZREW won a near-EUR 2m deal (ca. PLN 7m) for boiler modernization in the Netherlands. The deadline is set at August 2007. This is a small contract (ca. 2% of consolidated revenues). ZREW: PLN 3.5m deal ZREW signed an EUR 0.9m (PLN 3.5m) with Rafako for installation of a biomass combustion boiler in Wales.

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Analyst: Krzysztof RadojewskiLast Recommendation: 2007-02-05

(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 2 702.9 3 039.7 12.5% 3 368.8 10.8% 3 736.9 10.9% Number of shares (m) 25.5EBITDA 23.1 41.5 79.2% 84.1 102.8% 146.5 74.2% MC (current price) 2 680.7EBITDA margin 0.9% 1.4% 2.5% 3.9% EV (current price) 2 315.2EBIT 2.0 20.5 944.3% 61.5 199.9% 123.3 100.4% Free float 30.0%Net profit 2.0 8.5 320.5% 43.1 405.1% 90.1 109.0%

P/E 1 320.5 314.0 62.2 29.7 Price change: 1 month 41.3%P/CE 115.5 90.9 40.8 23.7 Price change: 6 month 56.7%P/BV 5.2 5.0 4.7 4.2 Price change: 12 month 123.4%EV/EBITDA 100.0 57.9 28.8 16.4 Max (52 w eek) 105.0Dyield (%) 0.0 0.0 0.0 0.8 Min (52 w eek) 37.1

Budimex (Reduce)Current price: PLN 105 Target price: PLN 83.7

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Budimex WIG

Budimex signed new contracts worth a total PLN 240m last month. Prices of road con-tracts rise, but so does competition, creating a downward pressure on margins. We at-tribute Budimex’s relative good performance in January to the high expectations among investors concerning the company’s real-estate business. We estimated that Budimex might generate PLN 1.7bn in real-estate revenues from 2007 to 2015, which, assuming a per-square-meter price of PLN 10,000-12,000, implies 140,000-170,000 square meters of usable space. Our average gross margin estimate for that period is 27%. This is the base-case scenario, but even the best-case scenario does not justify the price at which Budi-mex currently trades. Because we do not expect any positive surprises from Budimex’s Q4’06 earnings report, and because the stock has risen since our last rating, we are downgrading it from Hold to REDUCE. Budimex Dromex nails near-PLN 130m deal Budimex’s subsidiary Budimex Dromex signed an almost-PLN 30m deal with SFR Poland for executive designs and construction of an office/residential building under the name of "Atelier Residence." The project will kick off in March, and end in December 2008. This is an average contract (ca. 4% of consolidated revenues) with good profitability (awarded by a private com-pany). PLN 67.5m deal Budimex’s subsidiary Budimex Dromex won a contract for the first stage of the Gdańsk Univer-sity’s Social Sciences Department buildings. The contract value is PLN 67.5m with a deadline set at November 2008. This is a relatively minor contract (2% of our estimated consolidated FY2007 revenues). PLN 45.2m contract Budimex Dromex, a subsidiary of Budimex, won a contract from the city of Rybnik for sewerage systems in three of the city’s districts. The contract value is EUR 11.7m (PLN 45.2m). The deadline is August 2008. This is relatively small energy-engineering contract (close to 2% of consolidated revenues).

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Elektrobudowa (Hold)Current price: PLN 119 Target price: PLN 124.6

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Elektrobudowa WIG

Elektrobudowa signed new contracts worth a total PLN 60m last month, most of them for the most lucrative energy engineering jobs. We expect strong Q4’06 earnings figures. Because Elektrobudowa’s stock price has increased since our last rating, we are down-grading from Accumulate to HOLD. We remain optimistic on Elektrobudowa’s future growth. Three deals for PLN 22.1m Elektrobudowa signed three contracts with Vattenfall Heat Poland for switchgear upgrades and electrical work at the Żerań and Siekierki CHPs. The combined value of the two contracts is PLN 22.1m, with a two-year term. This is a mid-sized job (ca. 4% of our estimated FY2007 con-solidated revenues) in a highly profitable business line. PLN 24.4m deal Elektrobudowa signed a contract with Bełchatów coalmine for delivery, assembly and start-up of power stations worth PLN 24.4m. It will be carried out within the next few months. This is a mid-sized contract (ca. This is a relatively small contract (ca. 5% of our estimated FY2007 consoli-dated revenues) in the company’s most profitable line of business. PLN 14.5m job Elektrobudowa was awarded a job by Rafako to deliver and install power supply, control and measurement instruments, and automated control systems for the FGD system of the Jaworzno Power Plant. The contract value is PLN 14.5m. The deadline is set for July 2008. Elektrobu-dowa will perform the contract in consortium with Metso Automation Polska. Furthermore, the company reported that a member of its Management Board sold 2089 shares. This is the first major contract for Elektrobudowa’s Automation business line. It accounts for just under 3% of the consolidated revenues projected for FY2007. PLN 6.4m contract from BOT Elektrobudowa signed a PLN 6.4m contract with BOT Kopalnia Węgla Brunatnego Bełchatów for electrical work and container stations with a deadline in April/May 2007. The total value of all contracts signed with BOT KWB Bełchatów over the past 12 months is PLN 41m. This is a rela-tively small contract (ca. 1% of consolidated revenues).

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Hydrobudowa Śląsk WIG


(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 111.2 137.0 23.2% 238.0 73.7% 330.0 38.7% Number of shares (m) 3.4EBITDA -112.3 10.1 22.7 123.4% 37.1 64.0% MC (current price) 484.6EBITDA margin -101.0% 7.4% 9.5% 11.3% EV (current price) 481.7EBIT -114.2 6.6 19.1 190.9% 33.5 75.6% Free float 37.0%Net profit -114.6 5.6 15.2 170.9% 21.9 43.7%

P/E 86.1 31.8 22.1 Price change: 1 month 26.9%P/CE 52.6 25.7 19.0 Price change: 6 month 70.2%P/BV 192.5 27.3 12.2 Price change: 12 month 206.4%EV/EBITDA 47.5 22.3 13.3 Max (52 w eek) 149.7Dyield (%) 0.0 0.0 0.0 0.0 Min (52 w eek) 47.0

Hydrobudowa Śląsk (Reduce)Current price: PLN 144 Target price: PLN 115

Investors discounted the anticipated benefits of Hydrobudowa Śląsk’s merger with Hy-drobudowa Włocławek throughout January. The merger will probably drive the com-pany's valuation in the long term. The outlook on FY2007 is promising, however, since we are hearing no news about anticipated contract awards, we do not see a reason to revise our valuation. Because the price of Hydrobudowa’s stock has increased since our last rating, we are downgrading from Hold to REDUCE. Termination of 2004 contracts Hydrobudowa Śląsk terminated for default two significant agreements for sewage treatment upgrades in Ruda Śląska signed in 2004. The combined value of the two agreements was EUR 15.6m. But, given the low profitability of the company’s contracts acquired in the previous years, the terminations can have a positive impact on its earnings. PLN 39.3m deal A consortium of Hydrobudowa Śląsk, Hydrobudowa Włocławek (leader) and CTL Maczki won a contract for reclamation of the “Maślice” dumping ground in Wrocław. The contract price is PLN 39.3m, Hydrobudowa Włocławek’s share being PLN 27.5m, while Hydrobudowa Śląsk will earn PLN 7.9m. The deadline is eleven months. After Hydrobudowa Śląsk’s merger with Hydrobu-dowa Włocławek, the contract will be carried out by the new company, Hydrobudowa Polska.

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Polimex WIG




Polimex Mostostal (Reduce)Current price: PLN 195.2 Target price: PLN 154.5

Polimex drummed up PLN 150m in new business in January, and nailed a PLN 275m road construction contract at the beginning of February (a consortium with Dragados, the to-tal contract price is some PLN 688m). Because we do not expect any positive surprises from Polimex’s Q4’06 earnings report, and because the stock has risen since our last rating, we are downgrading it from Hold to REDUCE. PLN 32.2m facilities for Dell Polimex-Mostostal signed a PLN 32.2m contract for a steel structure that will be set up at the construction site of Dell Products’s manufacturing facilities in Łódź. The deadline is August 2007. This is a relatively small contract (ca. 1% of our estimated FY2007 consolidated reve-nues) in the company’s most profitable line of business. PLN 50m interest rate hedge Polimex-Mostostal entered into a PLN 50m interest rate swap that will run from 2007 until Janu-ary 2010. The company will make quarterly interest payments calculated at a fixed interest rate in exchange for interest payments from the bank calculated at the 3M WIBOR floating rate which, as of April 2008, will be modified every time the 3M WIBOR market rate floats outside a predetermined range. The hedge will profitable for the company if interest rates increase. PLN 85m deal Polimex-Mostostal signed a contract with Elektrociepłownia Białystok for a renewable energy generation system. The net contract price is PLN 85m (almost 3% of consolidated earnings). The deadline is the end of July 2008. Torpol’s EUR 18.8m deal, PKP terminates contract Polimex-Mostostal’s subsidiary Torpol led a consortium which won a contract for railroad track resurfacing and related work. The net bid was EUR 18.8m, Torpol’s share being EUR 4.6m. Polimex also reported that PKP had terminated the contract for a crosstown railway line in War-saw. According to PKP, the termination is for default: the contractor missed deadlines and did not exercise due diligence. Polimex denies it was in default. The parties are working on an ami-cable solution, that is why Polimex did not speak about the financial implications of the termina-tion. The crosstown line renovation contract was signed in June 2006, and its price is PLN 49.1m (including 50% for Polimex’ contractor work). According to the PKP PLK website, most of the contract work is complete, so, it looks like PKP’s claims will not be large. ALICO reduces interest below 5% Amplico Life (for ALICO) reported that ALICO reduced its equity interest in Polimex-Mostostal from 5.57% to 4.7%, having sold over 130,000 shares.

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(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 500.8 682.9 36.4% 1 249.5 83.0% 1 117.3 -10.6% Number of shares (m) 17.4EBITDA 24.5 33.1 34.8% 43.2 30.8% 68.4 58.2% MC (current price) 678.6EBITDA margin 4.9% 4.8% 3.5% 6.1% EV (current price) 610.1EBIT 14.4 22.2 53.7% 31.6 42.6% 58.5 85.1% Free f loat 45.0%Net profit 5.2 17.2 230.4% 22.4 30.0% 42.5 89.6%


Rafako (Reduce)Current price: PLN 39 Target price: PLN 34

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Rafako WIG

The top story for Rafako in January was the decision by its shareholders to issue up to 52.2 million new cum-rights shares. Given that the new stock offering is three times the current shares outstanding, the rights might be sold outside of the Elektrim group. But this is just a guess, not backed by any hard facts. Since our last Reduce rating, Rafako’s stock performed weakly relative to the market. Because we do not expect much improve-ment in the company’s recurring earnings, we are reiterating our REDUCE rating. Subsidiary’s PLN 15.4m deal Rafako’s subsidiary Elwo signed a PLN 15.4m contract for an upgrade of two electrostatic pre-cipitators at the Żerań CHP. The contract term will run from March 2007 until April 2008. Over the past 12 months, Elwo signed contracts with Vattenfall Heat Poland for a combined price of PLN 25m. This is a relatively small contract when considered against Rafako’s consolidated revenues (2% of the estimated FY2006 revenues). EUR 26.1 foreign contracts enter into force Rafako reported that the two contracts from Hitachi Power Europe signed in April and May 2006 with a combined value of EUR 26.1m have entered into force. EUR 1.4m subsidiary contract with EUR 94m option Rafako’s subsidiary Elwo signed contracts with Hitachi Power Europe for 6 electrostatic precipi-tators for 3 power plants (in Germany and the Netherlands). The total value of those contracts is EUR 95.4m, including a conditional EUR 94m if Elwo is approved as subcontractor by the end-customer. The customer has until February 2008. The deadline is in the second quarter of 2012. Over the past few quarters, Elwo achieved higher profitability than Rafako and carried out smaller contracts. The value of the Hitachi deal is significant at PLN 370m, but, first, the con-tract is conditional, and, second, it is spread over several years (ca. PLN 90m a year starting in 2008). GA approves stock offering Rafako’s shareholders decided to raise the company’s equity by up to PLN 104.4m by issuing up to 52.2 million cum-rights bearer shares of common “I” stock with a nominal value of PLN 2.00 each. Each Rafako share will carry one right entitling its holder to acquire three shares of the new stock. The date of record is set at February 23rd, 2007.

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Pharmaceutical Manufacturers and Distributors Drug market up 4.2% in 2006 The value of the drug market in net producer prices amounted to PLN 14.8bn in 2006, i.e. 4.2% more than in 2005. The sales of drugs to pharmacies increased 3.6% YoY, and to hospitals by 8.5% YoY. This was in line with our expectations. Bioton: PLN 400m blood plasma sales in 2009 Bioton leased a Plasma Fractionation Laboratory located in Mielec from a bankruptcy trustee for 80 thousand zlotys . The company wants to expand its operations to include blood-derived products used in the treatment of bleeding disorders such as hemophilia. To that end, Bioton also struck a partnership with a European manufacturer of blood-derived products. Bioton is to invest US $40-50m in a blood plasma fractionation laboratory, with a capacity to produce ca. 400,000 liters of plasma a year, with a value of some PLN 400m. According to the CEO, such an output might be achieved in 2009. It would cover the entire national demand. Ultimately, Bioton could double that capacity and export the fractionated blood products. The CEO says that the margins earned on blood plasma sales are high, though not as high as in case of insu-lin. Bioton: Acquisition of 8,16% stake in Indar Having obtain permission from the Ukrainian anti-monopoly authority to exceed a 25% share-holding stake in Indar, Bioton acquired an 8.16% stake in the company, increasing its interests in its equity to 29.29%. Ultimately, Bioton wants to have full control over Indar, which is Ukraine’s largest insulin producer. Furthermore, Bioton obtained financing for a project to build treatment plants reducing sewage-related emissions in the amount of PLN 4m, i.e. ca. 40% of the project value.

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(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 3 053.9 3 268.4 7.0% 3 463.2 6.0% 3 635.4 5.0% Number of shares (m) 23.4EBITDA 91.2 89.8 -1.6% 98.2 9.3% 106.1 8.0% MC (current price) 1 006.2EBITDA margin 3.0% 2.7% 2.8% 2.9% EV (current price) 918.5EBIT 80.7 79.3 -1.7% 87.7 10.6% 95.5 8.9% Free float 35.9%Net profit 68.6 66.6 -3.0% 75.2 12.9% 83.6 11.2%

P/E 14.7 15.1 13.4 12.0 Price change: 1 month 2.0%P/CE 12.7 13.1 11.7 10.7 Price change: 6 month 3.6%P/BV 2.6 2.3 2.0 1.8 Price change: 12 month 4.9%EV/EBITDA 10.1 9.8 8.4 Max (52 w eek) 49.0Dyield (%) 0.0 0.0 1.3 1.5 Min (52 w eek) 37.1

Farmacol (Accumulate)Current price: PLN 43 Target price: PLN 45.6

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Farmacol WIG

We predict that Farmacol will continue its upward sales momentum which is almost twice as high as the market average. In line with the Management’s earlier announcements, the fourth quarter will be crucial to the full-year performance as a period when Farmacol re-ceives annual sales performance bonuses from producers. That is why we expect the Q4 profitability to top the preceding quarters, and boost the full-year profitability perform-ance. We stand by our positive outlook for the company.


(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 3 891.5 4 117.4 5.8% 4 342.8 5.5% 4 554.6 4.9% Number of shares (m) 12.2EBITDA 91.2 107.1 17.4% 105.2 -1.8% 113.5 7.9% MC (current price) 966.0EBITDA margin 2.3% 2.6% 2.4% 2.5% EV (current price) 1 328.6EBIT 74.4 90.8 21.9% 89.2 -1.7% 97.8 9.7% Free float 47.9%Net profit 52.1 67.2 29.1% 69.1 2.8% 77.1 11.5%


PGF (Under Review)Current price: PLN 79 Target price: -

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2006-01-30 2006-05-30 2006-09-30 2007-01-30

PGF WIG

4

PGF’s Q4 sales growth rate will be slightly higher than the market average, at 5% YoY. We agree with the Management’s promises that * sales growth will go hand in hand with acceleration in profitability. Operating profit will also be boosted by a sale-and-leaseback transaction which will gross an estimated PLN 10m. We will revise our valuation of PGF’s stock after the Q4’06 earnings release. Acquisition of shares by subsidiary PGF’s subsidiary DOZ+ acquired a 100% stake in "Apex Farm" of Łódź for PLN 246,000.

BRE Bank Securities

5 February 2007 62


12

14

16

18

20

22

2006-01-30 2006-05-30 2006-09-30 2007-01-30

Prosper WIG


(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 1 714.6 1 820.1 6.1% 1 929.3 6.0% 2 025.7 5.0% Number of shares (m) 6.9EBITDA 25.3 24.5 -3.5% 25.1 2.5% 25.3 1.0% MC (current price) 121.4EBITDA margin 1.5% 1.3% 1.3% 1.2% EV (current price) 178.9EBIT 19.5 18.6 -4.7% 19.3 3.9% 19.7 1.9% Free f loat 58.1%Net profit 10.8 11.8 9.8% 13.0 10.4% 13.6 4.1%

P/E 11.3 10.3 9.3 8.9 Price change: 1 month -5.0%P/CE 7.3 6.9 6.5 6.3 Price change: 6 month 6.7%P/BV 1.3 1.1 1.0 0.9 Price change: 12 month 25.7%EV/EBITDA 6.3 6.1 5.6 5.1 Max (52 w eek) 20.4Dyield (%) 0.0 2.8 0.0 0.0 Min (52 w eek) 13.6

Prosper (Accumulate)Current price: PLN 17.6 Target price: PLN 20.9

Due to the large share of pre-wholesale in sales (ca. 30%), Prosper will traditionally re-cord slower revenue growth than its industry peers (we predict 4.6% YoY). The Q4 2005 earnings figures were boosted by bad debt allowance reversals (+PLN 4.8m), distorting the company’s operating profitability figures for that period. We expect that the lack of such reversals in Q4’06 will be compensated by improved recurring profit figures. After slightly weaker-than-expected Q3'06 earnings performance, we revised our FY2006 finan-cial forecast for Prosper slightly downward. Considered from a relative valuation stand-point, Prosper remains the cheapest pharmaceutical distributor stock.

BRE Bank Securities

5 February 2007 63



(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 1 412.9 1 554.2 10.0% 1 694.1 9.0% 1 812.7 7.0% Number of shares (m) 2.7EBITDA 11.5 15.9 38.0% 17.6 10.6% 19.4 10.3% MC (current price) 196.0EBITDA margin 0.8% 1.0% 1.0% 1.1% EV (current price) 208.1EBIT 7.7 12.2 57.4% 14.2 16.8% 15.9 11.4% Free float 24.0%Net profit 9.8 10.5 8.0% 12.2 15.7% 13.5 10.8%


Torfarm (Hold)Current price: PLN 72.6 Target price: PLN 63.7

35

45

55

65

75

85

2006-01-30 2006-05-30 2006-09-30 2007-01-30

Torfarm WIG

Torfarm’s Management promised robust revenue growth in the last quarter of 2006. We predict, however, that strong sales were achieved by keeping margins flat, if not lower. Two factors which reflected positively on Q4 results in 2005: extra bonuses from suppli-ers at the end of the year and finance income from loans, will not be repeated in Q4’06. However, the revenue increase should compensate for the lack of such one-offs, keeping profit steady. FY2007 is the first year that Torfarm’s latest acquisition, Galenica-Silfarm, is consolidated in the company’s financial statements. We will revise our financial pro-jections for Torfarm for FY2007 and subsequent years to account for the acquisition shortly. Acquisition of interest in Galenica-Silfarm Torfarm purchased the majority stake in GK Galenica-Silfarm that entitle to 97.7% votes at GA. The par value of acquired stake amounts to PLN 36.8m, and the total price is PLN 55.8m. At the same time the company purchased 20.8% of interest for PLN 2.9m in Galenica-Panax, GK Galenica-Silfarm’s subsidiary. Total price of acquired shares is PLN 7.6m. Taking into account the expected registering of GK Galenica Silfarm’s increased equity at PLN 20m, Torfarm will have 85.5% of votes at GK Galenica Silfarm’s GA and 85.7% votes at Galenica Panax’s GA. The final number of new issue shares will amount to 1.05m at PLN 60 issue price apiece. Galenica-Silfarm takeover will strengthen Torfarm’s position at pharmaceutical distribution mar-ket. Additionally, Torfarm purchased 941 shares in Dolpharma for PLN 0.5m that increased Tor-farm’s votes at GA to 98.3%. Torfarm will gain ca. 15.5% of market share thanks to those trans-actions, and will significantly improve its earnings.

BRE Bank Securities

5 February 2007 64


Retail/Wholesale Government bill on retail restrictions A Sejm subcommittee adopted a bill restricting the operation of big-box retail chains. According to the bill, each new outlet with a space of over 400 sqm would have to receive clearance from the local authorities, and would be subject to extra charges (permit fees). However, there is doubt whether the bill complies with EU laws, as similar legislative initiatives in France were questioned by the EU. The big box restrictions would reinforce smaller retail chains, and would therefore be good news for Eurocash and Eldorado, which are both developing their business in that market segment (“abc,” “Groszek.” “Delikatesy Centrum,” “Stokrotka” chains). Tim: Revenue target met Tim met its sales target for FY2006 (PLN 395m). The Management stressed that it was a big success for the company given the deep decline in copper prices in the second half of last year. Tim will reveal its net performance after an analysis of the costs generated in FY2006. Tim: Radosław Koelner nominated to Supervisory Board Tim’s shareholders appointed Radosław Koelner to sit on the Supervisory Board as replace-ment for Jan Walulik who had tendered his resignation. To date, neither Radosław Koelner, nor his company, have revealed any equity ties with Tim. The SB appointment might mean that Tim and Koelner are planning to strike a partnership. This would not come as a surprise as both sell finishing construction materials, so, their some of their distribution channels probably overlap. Tim: OFE AIG increased interest OFE AIG increased its equity interest in Tim from 9.74% to 10.23%. Tim: ING TFI increased exposure Investment funds managed by ING TFI increased exposure to Tim from 11.99% to 12.02%

BRE Bank Securities

5 February 2007 65



(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 1 280.1 4 140.1 223.4% 4 581.1 10.7% 5 041.0 10.0% Number of shares (m) * 13.3EBITDA 49.0 112.9 130.3% 126.6 12.2% 141.3 11.6% MC (current price) * 1 273.9EBITDA margin 3.8% 2.7% 2.8% 2.8% EV (current price) * 1 500.3EBIT 31.8 85.1 167.8% 95.6 12.4% 106.0 10.9% Free f loat 71.0%Net profit 20.9 57.9 177.7% 67.2 16.1% 77.1 14.7%


Eldorado (Reduce)Current price: PLN 96 Target price: PLN 83.78

20

40

60

80

100

2006-01-30 2006-05-30 2006-09-30 2007-01-30

Eldorado WIG

The upbeat sentiment to Eldorado’s stock observed for the past few weeks should be reinforced by the Q4 earnings results, and the unveiling of BOS’s and Eldorado’s post-merger growth strategy. For now, Eldorado’s stock price has far overshot our target, therefore, since we do not have enough information to revise our current projections, we are reducing our rating from Hold to REDUCE. If BOS shows FY2006 earnings figures above our expectations, however, we will likely raise our price target on Eldorado. “H” and “I” stock registration The court registered an offering of 6.289 million shares of “H” and “I” stock relating to the merger with BOS. In the next stage, Eldorado will purchase all outstanding shares of BOS’s stock, i.e. 1723 shares (5.23% of share capital). Later, Eldorado’s raised share capital following an issue of “J” and “K” stock will be registered with the relevant court. Conditional agreement to acquire Społem Tychy chain The Eldorado group will probably expand to include the Społem Tychy chain comprised of 36 stores located in the śląskie voivodship (including 4 big-box outlets, 11 mid-sized self-service stores, 10 small community stores, and 11 stores selling baked goods and household goods), an FMCG wholesale outlet, which also bakes and sells baked goods. Społem Tychy’s sales in 2006 approximated PLN 100m, which, assuming an average net profit margin of 2%, implies a net profit of some PLN 2m (Eldorado did not disclose the actual figure in its press release). Since we do not know the acquisition price, we cannot estimate for now what value the chain will bring to the Eldorado group (a UOKiK consent is still pending). The gross value of the ac-quired 75% stake in Społem Tychy, calculated based on the ratio of price/income for Eldorado, is an estimated PLN 19.5m. We think that the acquisition of Społem Tychy is a smart move on Eldorado’ part, as, in the midst of the ongoing market consolidation, only players that actively engage in those processes will survive in the face of the growing competition. Supervisory Board Reshuffle In line with earlier plans, EGA reshuffled the Supervisory Board. Mr. Wojciech Kossuth and Mr. Tomasz Krysztofiak were discharged and Mr. Zenon Mierzejewski and Wincenty Mura were appointed to replace them. At the same time, Mr. Tomasz Krysztofiak was appointed an inde-pendent member of the board. New “Stokrotka” outlet The “Stokrotka” supermarket chain has welcomed a new, 65th store. The newest “Stokrotka” has 500 sqm, and stands in Garwolin. We like how Eldorado is developing its Retail operations, which are bound to accelerate this year, propelled by the logistics synergies generated on the merger with BOS. In 2006, the chain was enlarged by 9 stores. Post-merger Retail reorganization The share capital of Stokrotka Sp. z o.o. was raised, and the new shares were acquired by BOS SA in exchange for a contribution of a 30% stake in Gośka Sp. z o.o. The transaction between two subsidiaries of Eldorado is part of the integration processes after the merger with BOS, and the reorganization of the merged company. Gośka Sp. z o.o. owns 8 supermarkets in north-eastern Poland with an average area of 700 sqm. The decision to concentrate retail around Stokrotka suggests that Eldorado is planning to consolidate its entire network under that brand name and speed up the supermarket expansion. The Management Board informed about the registration of subsidiary company – Eldorado Sp. z o.o., of which Eldorado has 100% shares at the total value of PLN 100,000. The decision to constitute the company is a part of the reorgani-zation process.

* incl. stock issue to BOS sharehodlers

BRE Bank Securities

5 February 2007 66





Eurocash (Sell)Current price: PLN 9.4 Target price: PLN 7.38

4

5

6

7

8

9

10

2006-01-30 2006-05-30 2006-09-30 2007-01-30

Eurocash WIG

Because the price of Eurocash’s stock has far overshot our target, we recommend to SELL the stock. We do not see any reason to revise our financial forecast and valuation at the moment. We might change our mind if we learned that Eurocash is planning acqui-sitions, but we have not heard much to that effect so far. Charlemagne Capital below 5% Funds managed by Charlemagne Capital reduced interests in Eurocash’s equity from 5.04% to 4.93%.

BRE Bank Securities

5 February 2007 67



(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 780.2 814.2 4.4% 812.5 -0.2% 829.0 2.0% Number of shares (m) 14.9EBITDA 164.5 187.1 13.7% 178.8 -4.4% 184.5 3.2% MC (current price) 804.6EBITDA margin 21.1% 23.0% 22.0% 22.3% EV (current price) 1 156.8EBIT 72.0 93.0 29.2% 88.0 -5.4% 96.9 10.1% Free floatNet profit 33.4 50.6 51.7% 53.7 6.0% 62.1 15.7%


Kogeneracja (Hold)Current price: PLN 54 Target price: PLN 61.8

35

40

45

50

55

60

65

70

2006-01-30 2006-05-30 2006-09-30 2007-01-30

Kogeneracja WIG

Despite unfavorable weather conditions in Q4 2006, we anticipate a positive surprise from Kogeneracja stemming from sales of CO2 emission credits which might mitigate the negative weather impact. We will review our target price and rating after we learn the Q4 earnings figures. We are reiterating our positive rating on Kogeneracja. PLN 175m heat sale Kogeneracja signed a one-year heat supply agreement with Fortum Wrocław. Its tentative value is PLN 175m. This is a standard heating agreement. Kogeneracja's Q4’06 operating income will suffer due to warm weather. However, that impact will be offset by the income earned on sales of surplus CO2 emission credits. Trade union dispute Kogeneracja’s workers demand that the company discontinue outsourcing of coal feed and gas removal. The company’s Management is going to act in accordance with the labor dispute regu-lations. This news demonstrates the Management’s dedication to reducing costs. We do not expect the dispute to affect the company’s operations.

Others

BRE Bank Securities

5 February 2007 68



(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 1 282.5 1 443.9 12.6% 1 603.4 11.0% 1 673.1 4.3% Number of shares (m) 50.0EBITDA 304.5 434.9 42.8% 466.5 7.3% 480.9 3.1% MC (current price) 4 980.0EBITDA margin 23.7% 30.1% 29.1% 28.7% EV (current price) 4 979.7EBIT 197.2 326.4 65.5% 368.9 13.0% 380.9 3.2% Free f loat 19.0%Net profit 135.4 270.0 99.4% 303.3 12.3% 313.2 3.3%

P/E 36.8 18.4 16.4 15.9 Price change: 1 month -0.4%P/CE 20.5 13.2 12.4 12.1 Price change: 6 month 25.6%P/BV 5.1 5.1 4.8 4.5 Price change: 12 month 84.4%EV/EBITDA 16.2 11.5 10.7 10.4 Max (52 w eek) 106.4Dyield (%) 4.0 4.9 5.0 4.9 Min (52 w eek) 52.0

Mondi (Reduce)Current price: PLN 99.6 Target price: PLN 80

30

50

70

90

110

2006-01-30 2006-05-30 2006-09-30 2007-01-30

MONDI WIG

We are reiterating our REDUCE rating on Mondi given its current price. In our opinion, the paper market trend is coming to an end, and the risk of hikes in the prices of wood is increasing, limiting the upside potential of Mondi’s stock. Our FY2007 earnings projec-tions are optimistic, but, even in the best-case scenario, our DCF-derived valuation is lower than the current WSE quote. FQ4 results Mondi published its Q4 earnings. Revenues increased to PLN 388m, EBIT rose to PLN 110m, and net profit climbed to PLN 99m. The actual figures came in slightly above our expectations: PLN 391m, PLN 102.5m, and PLN 80m respectively. The strong bottom line was mainly gener-ated from non-core business operations. MPP recorded a PLN 23m gain from the sale of sur-plus emission credits in the fourth quarter of 2006, which boosted EBIT. The cost of wood rose 2% in Q4. Adjusted for the emission credit sale, MPP’s earnings were in line with expectations. The sale took place at the beginning of 2006, when emission credit prices were much higher. In September, the price per ton of emissions was EUR 14, but fell to EUR 3 at the end of the year. This indicates that MPP will not repeat last year’s robust gain on sale of its surplus emission credits. We stand by our view that the paper market cycle is coming to an end, and that the prices of wood might go up, and therefore recommend to reduce positions in paper stocks. Paper prices The European prices of corrugated cardboard paper remained practically unchanged last month. If we factor in PLN depreciation against the Euro, PLN paper prices increased by an average 3%.

BRE Bank Securities

5 February 2007 69



(PLN m) 2005 2006F change 2007F change 2008F change Basic data (PLN m)Revenues 1 015.5 1 315.9 29.6% 1 369.3 4.1% 1 423.8 4.0% Number of shares (m) 34.7EBITDA 57.1 73.5 28.7% 93.1 26.8% 107.0 14.9% MC (current price) 731.1EBITDA margin 5.6% 5.6% 6.8% 7.5% EV (current price) 866.9EBIT 43.8 54.0 23.3% 73.3 35.8% 86.2 17.6% Free float 16.2%Net profit 38.4 38.6 0.7% 53.1 37.5% 65.4 23.1%


Provimi-Rolimpex (Hold)Current price: PLN 21.1 Target price: PLN 21.81

15

17

19

21

23

25

2006-01-30 2006-05-30 2006-09-30 2007-01-30

Provimi-Rolimpex WIG

`

We expect that Provimi-Rolimpex will show weaker Q4’06 earnings figures than a year earlier due to soaring feed-grade grain prices which cannot be fully offset against feed selling prices. This, however, will not affect the company’s stock performance which cur-rently depends on the tender offer price (PLN 21.31). Acquisition of Provimi SA, tender offer for Rolimpex Nutrilux, a subsidiary of the private equity fund Permira, bought a controlling stake (74.05%) in Provimi SA (owner of a 77.75% stake in Rolimpex) from majority shareholders, the investment funds CVC and PAI,. As a result, Nutrilux has become an indirect controlling shareholder of the company, and is holding a tender offer for the outstanding 22.25% shares, as required by the law. The tender price (PLN 21.31) is set at the minimum statutory level (three-month average). In our opinion, the price does not factor in the expected premium owing to minority shareholders for delisting of Rolimpex, and for the fact that Provimi is probably able to pay out dividends from its FY2006 profit.

BRE Bank Securities

5 February 2007 70


Research Department: Michał Marczak tel. (+48 22) 697 47 38 Director [email protected] Strategy, telco, mining, metals, media Marta Jeżewska tel. (+48 22) 697 47 37 Deputy Director [email protected] Banks

Analysts: Andrzej Lis tel. (+48 22) 697 47 42 [email protected] IT Krzysztof Radojewski tel. (+48 22) 697 47 01 [email protected] Pharmaceuticals, construction, utilities Kamil Kliszcz tel. (+48 22) 697 47 06 [email protected] Retail, materials, other

Jacek Borawski tel. (+48 22) 697 48 88 [email protected] Technical analysis

Sales and Trading:

Piotr Dudziński tel. (+48 22) 697 48 22 Director [email protected] Grzegorz Domagała tel. (+48 22) 697 48 03 Deputy Director [email protected] Salesmen: Marzena Łempicka tel. (+48 22) 697 48 95 [email protected] Krzysztof Solus tel. (+48 22) 697 47 31 [email protected] Traders: Emil Onyszczuk tel. (+48 22) 697 49 63 [email protected] Grzegorz Stępien tel. (+48 22) 697 48 62 [email protected] Joanna Niedziela tel. (+48 22) 697 48 54 [email protected] Tomasz Dudź tel. (+48 22) 697 47 31 [email protected] Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/49 00-950 Warszawa www.dibre.com.pl

BRE Bank Securities

5 February 2007 71


Previous stock ratings before the revisions made in this Monthly Report:

Recommendation Accumulate

Date issued 2007-01-09

Price on day of recommendation 938.50 WIG on day of recommendation 50477.49

BPH

Recommendation Reduce



Accumulate

2006-08-31

143.50 43363.32

Hold

2006-09-06

150.00 45033.33

Reduce

2006-11-07

196.00 48767.01

Reduce

2006-12-04

206.10 50601.74

Hold

2007-01-09

191.00 50477.49

Hold

2006-05-24

135.00 40815.61

ComArch

Recommendation Accumulate Hold Hold Reduce

Date issued 2006-07-20 2006-08-04 2006-08-18 2006-10-31

Price on day of recommendation 56.50 65.90 67.50 79.00 WIG on day of recommendation 42278.45 43507.40 42968.60 47761.04

Hold

2007-01-09

73.10 50477.49

Budimex

Recommendation Accumulate Accumulate

Date issued 2006-05-19 2006-07-04

Price on day of recommendation 6.15 5.90 WIG on day of recommendation 42853.98 40760.21

Reduce

2006-09-06

7.40 45033.33

Sell

2006-10-03

8.10 44209.10

Reduce

2006-11-24

8.52 49701.36

Hold

2007-01-09

7.90 50477.49

Eurocash




Hold

2006-08-17

78.00 43402.61

Hold

2006-10-05

85.40 44267.46

Accumulate

2007-01-09

105.00 50477.49

Elektrobudowa

Recommendation Buy



Accumulate

2006-08-04

65.00 43507.40

Hold

2006-09-06

66.50 45033.33

Reduce

2006-11-07

78.00 48767.01

Accumulate

2006-11-24

78.00 49701.36

Hold

2006-12-05

92.90 51680.97

Eldorado

Recommendation Buy Buy Accumulate

Date issued 2006-07-10 2006-08-25 2006-09-06

Price on day of recommendation 104.00 98.20 102.90 WIG on day of recommendation 42875.60 42900.39 45033.33

Accumulate

2006-12-01

99.00 50601.74

Accumulate

2006-05-19

118.00 42853.98

Computerland

BZ WBK Recommendation Hold Hold Hold Accumulate

Date issued 2006-07-10 2006-08-04 2006-11-29 2007-01-09

Price on day of recommendation 188.00 190.00 208.50 225.00 WIG on day of recommendation 42875.60 43507.40 49344.90 50477.49

Recommendation Hold



Hold

2007-01-09

120.00 50477.49

Hydrobudowa Śląsk

BRE Bank Securities

5 February 2007 72


Recommendation Hold



Hold

2006-07-26

5.95 44063.27

Reduce

2006-10-03

6.44 44209.10

Hold

2006-10-26

6.79 47951.50

Reduce

2006-12-05

7.80 51680.97

Hold

2007-01-09

8.05 50477.49

Hold

2007-01-29

10.14 53487.96

Millennium

Recommendation Accumulate Hold Hold Hold Hold

Date issued 2006-05-16 2006-08-04 2006-10-05 2006-11-07 2007-01-09

Price on day of recommendation 94.00 112.00 132.00 155.00 156.60 WIG on day of recommendation 45894.55 43507.40 44267.46 48767.01 50477.49

Polimex Mostostal

Prokom Software Recommendation Accumulate Buy

Date issued 2006-05-18 2006-07-10


Accumulate

2006-08-04

139.00 43507.40

Buy

2006-08-21

127.50 43166.87

Accumulate

2006-09-06

139.90 45033.33

Buy

2006-10-03

131.70 44209.10




Buy

2006-06-07

613.50 40352.53

Buy

2006-08-22

628.00 43194.29

Accumulate

2006-09-06

675.00 45033.33

Hold

2006-11-07

755.00 48767.01

Buy

2006-11-29

724.00 49344.90

ING BSK

ING BSK Recommendation Accumulate Accumulate

Date issued 2006-12-05 2007-01-09


Recommendation Accumulate Date issued 2007-01-09


Pekao

Macrologic Recommendation Buy Accumulate Buy

Date issued 2006-09-21 2006-11-07 2006-11-13

Price on day of recommendation 34.59 41.30 40.90 WIG on day of recommendation 44176.62 48767.01 49032.64

Techmex Recommendation Buy



Hold

2006-10-12

23.79 46340.32

Accumulate

2006-11-07

20.22 48767.01

Accumulate

2006-12-04

25.00 50601.74

Buy

2007-01-09

23.75 50477.49

Prokom Software Recommendation Accumulate Accumulate

Date issued 2006-12-01 2007-01-09


BRE Bank Securities

5 February 2007 73


List of abbreviations and ratios contained in the report. EV – net debt + market value (EV – economic value) EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation PBA – Profit on Banking Activity P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales Recommendations of BRE Bank Securities S.A. A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The present report was prepared with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation. Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible. BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any dam-ages incurred as a result of investment decisions taken on the basis of the present report. It is possible that BRE Bank Securities S.A. renders, will render or in the past has rendered services for companies and other enti-ties mentioned in the present report. BRE Bank Securities S.A., its shareholders and employees may hold long or short positions in the issuers’ shares or other financial instruments related to the issuers’ shares. BRE Bank Securities S.A., its affiliates and/or clients may conduct or may have con-ducted transactions for their own account or for account of another with respect to the financial instruments mentioned in this report or related investments before the recipient has received this report. Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of BRE Bank Securities S.A. Recommendations are addressed to all Clients of BRE Bank Securities S.A. The activity of BRE Bank Securities S.A. is subject to the supervision of the Polish Financial Supervision Commission. BRE Bank Securities S.A. serves as animator in relation to the shares of the following companies: Millennium, Mondi, Pemug, Poli-mex - Mostostal Siedlce, Skarbiec Nieruchomości certificates. BRE Bank Securities S.A. receives remuneration from issuers for services rendered to the following companies: Agora, Assecco Poland, Bakalland, Computerland, Elektrobudowa, Kęty, Koelner, PGNiG, Polimex - Mostostal Siedlce, Polmos Lublin, Prokom Software, Provimi - Rolimpex, Torfarm, ZA Puławy. The information, including ratings, summarized in this Monthly Report, was published in separate Research reports released on dates as specified on page 6 of this Monthly Report. The list of ratings changed in this Monthly Report can be found on page 7. The present report was not transferred to the issuer prior to its publication. Individuals who did not participate in the preparation of recommendations, but had or could have had access to recommendations prior to their publication, are employees of BRE Bank Securities S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendations. Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.

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