All Reports

22.02.12
NCSP: More Bang per Buck of Capex
With this note we increase our DCF-based 12M target price for NCSP’s GDRs from $12.00 to $12.25 and reiterate our BUY rating. We argue that NCSP is currently unfairly undervalued by the market. Our positive view on the company is supported not only by its fundamentals, but also by the government’s plans to privatise its 20% stake in NCSP, which may lead to a positive rerating of the stock. Value-accretive changes in investment programme from new management. A new strategy has already been developed and we expect it to be presented to the public in the next few months. The...
20.02.12
OFZ MONITOR: Litmus Test
Primary Market MinFin officially confirmed that on Wednesday (22 Feb) a new issue of OFZ 26207 will be placed instead of the planned OFZ 26205. The new bond will be the longest of the liquid OFZs with 15 years to maturity (maturity date: 3 Feb 2027). The coupon is set at 8.15% with a period of 182 days. The modified duration is 8.2 years and the yield to maturity is 8.32% at price 100. The planned volume of OFZ 26207 is RUB10bn. Observations and Recommendations We believe the results of the OFZ 26207 auction will be a litmus test for...
17.02.12
PROTEK: Target Price Raised on Optimised Revenue Structure
Protek posted its FY11 trading update yesterday which revealed an optimised revenue structure in 4Q11, allowing the company to post 14.6% YoY revenue growth. More importantly, these positive changes to the revenue structure should trigger improved profitability in 4Q11. Protek was able to reduce its product assortment, eliminating low-margin products and focusing on more profitable drugs. This evidences the company’s increasing exposure to the commercial segment of the Russian pharma market with respective revenue rising 21.7% YoY in 4Q11, which is extremely positive for its margins. We expect this trend to continue in 2012. Valuations are exceptionally attractive. The shares...
16.02.12
STRATONOMICS: FEBRUARY
In our January issue of Stratonomics (17 Jan 2012) we highlighted that all MSCI Russia sector indices except for consumer staples are trading at a discount to MSCI EM peers. In our latest strategy piece (see The Chance of a Lunchtime, 10 Feb 2012) we outlined that investors’ greater appetite for risk of late should benefit EM equities and be especially supportive for the beaten-down CEEMEA region. South Africa, last year’s best performer in CEEMEA, in our view is structurally a defensive market and hence should be less attractive to investors given the current higher risk tolerance. We therefore expect...
15.02.12
OFZ MONITOR: Good but Not Great
Primary Market MinFin held an auction to place OFZ 26206s today. This auction was less successful than the previous two featuring 26205s though the result was fairly expected, given the preliminary guided yield range of 7.45-7.50%. This assumed a discount of around 4 bpts at the time of announcement. Less than positive news from Europe this week affected the situation too. Nevertheless RUB18.8bn of bonds (94% of the planned offer of RUB20bn) were placed at a weighted average yield of 7.49% (a 1 bpt discount to the higher end of the range), while the cut-off yield was 7.50%. The book...
15.02.12
RUSSIAN COAL: Coal: Who Will Be King When the Oil and Gas Run Out?
We initiate coverage of Russian coal companies Mechel, Raspadskaya, Kuzbasskaya Toplivnaya Kompania (KTK) and Kuzbassrazrezugol (KZRU). Coal is vital for the world economy: it is a basic fuel for power generation, transport and steel. Russia is a strategic player in the global coal trade, hosting 18% of the world's coal reserves. Russian coal companies offer large, good-quality reserves and competitive production costs, making some of them interesting investment ideas, in our view. World coal consumption should rise with long-term demand driven by Asia. Coal accounts for 27% of the world’s primary energy demand, making it the second-most important fuel after...
13.02.12
PHARMSTANDARD: Low PEG, Few Triggers: TPs Cut, but BUY Maintained
With this note we cut our target prices for Pharmstandard’s GDRs and local shares to $22.5 (from $25.0) and $71.9 (from $80), respectively. We maintain our BUY rating on both shares. Results review: margins raise flags. FY11 revenue beat consensus and our expectations by 15% and 14%, respectively. However, the company’s top line growth of 44% YoY (to RUB42.7bn) in roubles was primarily attributable to third-party drug distribution (+120% YoY to RUB21.7bn) where margins are much lower vs Pharmstandard's OTC or prescription drug sales. Both of the latter units’ revenues were below our expectations in 4Q11 with OTC sales down...
10.02.12
RUSSIAN EQUITY STRATEGY: The Chance of a Lunchtime
Signs of risk aversion subsiding. Over the past month or so global markets have been advancing and there are several indications that risk aversion is subsiding: bad news is being ignored (implying that it is already priced in), volatility and yields are falling, small caps have started to outperform large caps, and cyclical stocks are outperforming non-cyclicals. Greater appetite for risk should be supportive for emerging markets, CEEMEA and especially Russia. Russia has tended to outperform in previous recoveries and we believe that the country, which was a major underperformer in 2H11, for the first time since Nov 2010 now...
08.02.12
OFZ MONITOR: Here Go the 205s Again
Primary Market MinFin changed today's auction paper and offered OFZ 26205s, which were successfully placed a week ago. Despite the replacement, the issue was almost completely placed (99% of the offer size, or RUB34.6bn) within the guided range of 7.75-7.80% (7.76% weighted average yield). The book was oversubscribed by ‘just’ 2.7x today vs 5.5x last week. We consider this impressive, taking into account that the yield of the OFZ 26205, which has been auctioned for the second week in a row, has fallen 50 bpts. Observations and Recommendations As we expected last week, the OFZ market has continued to grow...
03.02.12
VTB: Minorities Buyback: Road to Nowhere?
Yesterday (2 Feb) Prime Minister Vladimir Putin ordered VTB to consider a buyback of minority shareholders, with the bank required to present a plan on Monday (6 Feb). We believe this development could be positive in the short term but it is likely to have a deeply negative underlying effect on the investment case of VTB and all Russian state-owned companies. We reiterate our negative view on VTB. Recap. Speaking at a conference on Thursday, Putin said a buyback should be concluded so that VTB’s “minority shareholders would suffer no losses”. He added that the state was ready to finance...
03.02.12
X5 RETAIL GROUP: A Balanced Plan for 2012
We upgrade the stock to a BUY rating from Hold and raise our target price by 5% to $27.9 per GDR (vs $26.7 previously) after the company held a conference call yesterday during which it presented its strategy for 2012, which looks balanced to us. 2012 investment programme to focus on efficiency improvements. X5 targets doubling its logistics capex and raising maintenance capex by 50% which would result in margin sustainability, in our view. It plans capex of RUB45bn ($1.49bn) in 2012, financed by operating cash flows (we estimate that X5's CFO covers 68% of planned capex) and the sale...
03.02.12
MOSTOTREST: The Ketchup Effect
With this note we revisit our case on Mostotrest, Russia’s largest transport infrastructure construction company. While we reduce our 12M target price from $10.1/share to $8.8/share largely to reflect a lacklustre 2011 and an increased WACC, we continue to argue that Mostotrest offers unique exposure to the Russian infrastructure construction market. A lacklustre 2011. Last year was marked by a growth slowdown in the transport infrastructure construction market. New tenders leaked out more slowly than ketchup from a bottle, the execution schedules for certain active projects were revised and a few were even mothballed. In 2011, the Moscow city administration...
02.02.12
REGIONAL GAS DISTRIBUTORS: Closer to a Happy Ending?
The swap deal between Gazprom and Rosneftegas in which the latter will exchange minority stakes in 72 regional gas distributors (RGD) for a 0.89% share in Gazprom may be finalised at the beginning of 2012. From an investment perspective, we suggest sticking with the stocks that: - Offer a strong financial performance, creating a greater chance of a valuation upgrade - Provide more attractive valuation ratios vs their peers - Offer high upside potential relative to the earlier Nov 2008 valuation We favour Vladimiroblgas, Rostovoblgas, Kalugaoblgas, Kostromaoblgas, Belgorodoblgas and Tveroblgas, which delivered a solid financial performance in 2007-10, feature relatively...
01.02.12
OFZ MONITOR: Another Successful Placement
Primary Market The Ministry of Finance successfully placed the OFZ 26205 issue (96.7% of the offer size, or RUB33.9bn) today. The guided coupon range was 8.30-8.40% while the bond was placed at a weighted average yield of 8.25% (5 bpts below the low end of the range) with demand amounting to nearly RUB200bn. The amount of bonds outstanding thus stands at nearly RUB80bn. Observations and Recommendations The OFZ market continued to grow over last week: the average z-spread to swaps decreased by 14 bpts and average price growth reached 65 bpts. In our view the success of the auction confirms...
31.01.12
MAGNIT: More Margins, More Cash, More Square Meters...
We raise our target price for Magnit from $25.9 to $31.1 per GDR (+20%) while maintaining our BUY rating on the stock. Network expansion may provide a positive surprise in 2012. Magnit's 4Q11 results came in exceptionally strong. The figures suggest that the company generated more cash from operations in 2011 than we anticipated ($611mn). Coupled with $475mn in SPO proceeds received in late December we believe the company is well-positioned to finance its network expansion in 2012. FY11 figures were strong and margins look sustainable. Top line reached $11.4bn, up 47% YoY, and the company was able to sustain...
30.01.12
BASHNEFT: Bashneft’s Subsidiaries: An Oblique Approach to Gaining Bashneft Shares
Consolidation under consideration. During its 3Q11 results conference call last December, Bashneft’s CEO Alexander Korsik said that the company was evaluating its refining assets in light of the introduction of the 60-66-90 tax system. When the process has been completed the company will decide whether to consolidate its refineries or leave things as they stand. Share swap is the best option. We believe that reorganisation involving a swap of the subsidiaries’ shares for Bashneft shares is the best option for the company to consolidate 100% of Ufa Refinery, Novoil, Ufaneftekhim, Ufaorgsintez and Bashkirnefteproduct. A simple buyout of minorities’ shares in...
25.01.12
OFZ MONITOR: Narrow Spreads Suggest OFZs are Overvalued
Primary Market The Ministry of Finance successfully placed the 26206 issue (97% of the offer) today. As we expected, most demand was concentrated at the high end of the range (60% of the issue was placed at 8.04%, with an additional 20% at 8.05%). After the auction we saw active deals in 26206s at yields of 8.01-8.03% As a result the base curve was in high demand. Observations and Recommendations At the moment we see the OFZ curve flattening: yields in one-year durations increased 2-4 bpts, while for long-term bonds they compressed by 10-30 bpts. We consider this a positive...
24.01.12
GLOBAL PORTS: Past Performance Does Not Guarantee Future Results
Global Ports is one of Russia’s largest stevedoring companies with a focus on container and oil product transhipments. The company looks solid in terms of its financial position and corporate governance, but as a participant in the highly volatile container transportation market, it is vulnerable to setbacks in the economy. At the same time its current stock price, on our estimates, implies a rather stable outlook for Russian economic growth and premiums on valuation ratios to its Russian peers. We thus see limited growth opportunities for the stock and initiate coverage on Global Ports’ shares with a HOLD rating and...
23.01.12
TRADE IDEA: SBERBANK OVER VTB. We Continue to Prefer Sberbank
From September last year to year-end 2011, Sberbank strongly outperformed VTB. In 2012, the situation has changed: so far, VTB’s shares have been stronger. We think this is not sustainable and continue to favour Sberbank in the mid-term perspective: 1) For several weeks, VTB could gain more ground on Sberbank but this does not look like a medium-term trend reversal. 2) The two large-cap banking stocks have recently been performing differently relative to the MICEX index as well. 3) Oil price dependence favours Sberbank in a relative trade. Bottom line: we see recent relative strength in VTB as another opportunity...
20.01.12
RUSSIAN EQUITY STRATEGY: Cost of Equity Increased on Political Uncertainty
In this report, we raise our base cost of equity (CoE) by 80 bpts to 12.5% following large-scale public protests against alleged falsifications in the results of the 4 Dec Duma elections. Our preferred measure of Russia’s country-risk premium (10Y CDS multiplied by the excess volatility of the RTS Index over the S&P 500) has risen since our last revision to our base CoE in Jan 2011, and hence warrants an upward adjustment. Although we see little in common between events in Russia and movements in the Arab world and the protesters may be too disjointed and weak to lead...
18.01.12
OFZ MONITOR: Good Auction at the Top of the Market
Primary Market Despite global risks, today’s auction of the 25079 issue was rather successful: the bid/supply ratio exceeded 2x and MinFin placed 91% of the RUB20bn on offer. In terms of yield, demand was close to 7.70% while the weighted average yield amounted to 7.67%. After the auction, deals in 25079 were priced 5-6 bpts higher than the placement price. Observations and Recommendations Meanwhile, our model does not suggest that aggressive growth in OFZs will continue, despite the continuing record spreads to currency swaps. In our view, the 25079 issue was placed successfully due to the momentum seen since the...
17.01.12
STRATONOMICS: JANUARY
With European debt issues, global growth concerns and political unrest in the Middle East severely complicating the development of investment strategies for 2012, it may be useful to consider where markets stood at the start of 2011. Russia’s GDP growth outlook for the coming year is marginally lower than at the start of 2011, though not dramatically so despite the weakened global backdrop. And importantly, the Urals Med oil price is around 19% higher now, at $110/bbl. We note that MSCI Russia is entering 2012 after underperforming MSCI EM last year, whereas Russia had outperformed going into 2011. Despite this,...
16.01.12
EVRAZ PLC Initiation of Coverage: Looking Forward to Construction Market Recovery
Following Evraz’s successful redomiciliation to the UK we discontinue coverage of its GDRs (EVRZ LI) and initiate coverage of Evraz Plc (EVR LN) with a target price of GBp 412/share and a HOLD rating. Evraz Plc's shares were admitted for trading on the LSE on 7 Nov 2011. On 8 Dec it was confirmed that the shares would be eligible for inclusion in the FTSE 100 from 19 Dec, making it the only steel stock on the index. To date over 99.8% of the old Evraz shares have been converted into the new stock. The deadline for the offer has...
16.01.12
FEDERAL GRID COMPANY (FSK): Lower Risk than MRSKs, but Triggers are Lacking.
In this note we initiate coverage of Federal Grid Company (FSK) with a 12M TP of $0.0145 (47% potential upside, WACC of 13.4%), and a BUY rating. We believe the company demonstrated satisfactory performance under RAB in 2010, earning an effective rate of return on RAB of 3% (vs the regulatory rate of 4%). We have not identified any significant problems in regulation of FSK so far, but we see federal government intervention as a key risk. In this regard, to stay on the conservative side, we incorporated government tightening plans by explicitly capping transmission tariff growth at 10% in...
11.01.12
RUSSIAN REGIONS HANDBOOK 2012: Debt Geography
The primary purpose of this report is to offer investors a better understanding of Russian regional bond issuers, both in terms of the relative value of bonds already on the market and new issues to come. While credit ratings are the benchmark of choice in the fixed income space, they are not an ideal criterion for comparing regional bond issues: not all regions have ratings from the same agencies, different agencies occasionally have markedly different views on a particular region, and ratings are revised infrequently. ...
22.12.11
ATON METALWATCH - December 2011
In this last issue of Aton Metalwatch for 2011 we take stock of the year that was and try to anticipate what the start of 2012 could bring. In 2011 the market capitalisation of sector firms broke away from the positive dynamics set in 2009-10, with companies at times suffering significant declines. As a result, looking at the sector’s five-year performance, we see that certain segments have done little to generate shareholder returns. The steel and pipes subsector suffered the worst decline, losing almost a quarter of its 2006 market value to date. Base metal and coal companies fared much...
22.12.11
RUSSIAN BANKS: 3Q11 Reporting Season Key Takeaways: Risks are Rising
In recent weeks, all five traded Russian banks have reported their 3Q11 IFRS results. For most of them the picture was negative: margins held up QoQ but only at the cost of accepting higher risk. In this note we present key takeaways from the reporting season. Securities and FX losses were among the key concerns. The banks on average lost close to 3% of their equity to securities losses in 3Q11, taking below-the-bottom-line revaluations into account. This underscores our opinion that banks’ exposure to market risk can be very costly (see RUSSIAN BANKS: The Lemons Problem released 9 Nov). Core...
22.12.11
CHERKIZOVO: Grain Prices: More Pressure in 2012?
We expect domestic grain prices to be under pressure in 2012. According to a USDA report released on 9 Dec the world has been moving from a crop deficit to a crop balance over the course of 2011 with harvests normalising globally. Russia is similarly moving from a grain deficit to a grain balance, which has been pressuring prices. Grain prices rose during the recent harvest season as grain traders and processors restocked their inventories, which resulted in unusually high demand. Given that their stocks have now been refilled, we can expect reduced local demand for grain which will remove...
22.12.11
AZERBAIJAN STATE RAILWAYS: Coupon Step-up Implies Higher Bond Price
The year is close to its end and Azerbaijan State Railways (ADDY) is unlikely to receive a credit rating from a top-three international rating agency before the New Year dawns, in our view. This has certain important consequences for holders of the $125mn AZRAIL 8.25% LPN due in 2016. § The bond documentation for AZRAIL 16 contains a covenant which obliges ADDY to receive a credit rating from S&P, Moody’s or Fitch before 31 Dec 2011, provide written evidence of this development and disclose the rating it received to the lender, trustee and agent bank of the LPN programme (Clause...
19.12.11
MGTS: Cessation of Coverage
We are discontinuing coverage of MGTS, including our HOLD rating on the common shares and BUY rating on the preferred stock. Any fundamental triggers for the stock are currently restricted by MGTS’s low liquidity....
16.12.11
CTC MEDIA: CEO Departs, Adding More Uncertainty
CEO moves from CTC Media to VimpelCom. Yesterday (15 Dec) CTC Media’s CEO Anton Kudryashov left to head VimpelCom Ltd’s Russian division. CTC Media’s CFO Boris Podolsky will serve as temporarily CEO until a replacement is named. Kudryashov's departure was expected but considerable operating uncertainty remains at the company. ...
16.12.11
STRATONOMICS: DECEMBER
Although we believe that recent anti-government protests in Russia have been of a relatively mild nature, potential changes in Russia’s political landscape mean that a higher political risk premium will likely be applied to its equities, at least in the short term. Figure 1 (please see report) demonstrates how since 4 Dec a jump in Russia-risk aversion has led to a spike in the spread between 5Y CDSs for Russia and Brazil (two commodity markets). Since Russia’s parliamentary elections MICEX has dropped 11.5% vs a 5.9% decline on MSCI EM, while Urals Med had retreated 5.7%. MICEX sector indices have...
15.12.11
PIPE PRODUCERS: Hard Times Ahead?
With this note we revise our investment case for Russian pipe producers TMK and Vyksa Steel Works. High oil prices are supporting drilling activity in the global oil and gas sector, generating demand for OCTG pipes, while the ongoing construction of large-scale pipelines in Russia by Gazprom and Transneft is bolstering demand for large diameter pipes (LDP). At the same time, the unresolved European debt crisis combined with weak economic data could signal a slump in the eurozone in 2012, with a negative read-through for the Russian economy. We therefore maintain a cautious outlook on the pipe industry: industry participants...
14.12.11
CONSUMER CYCLICALS: Waltzing on the Titanic
In this report, we argue that in an atmosphere of rising concerns over potential global economic turmoil, credit market tightening and oil price downside risk, the rouble may weaken, obliging Russian consumers to become more price sensitive, avoid restaurants and put off purchasing electronic devices. We believe that M.Video (BUY; TP: $9.8, 56% potential upside) is well positioned to survive – and even thrive – in a crisis, while Rosinter (SELL; TP: $4.0, 11% downside) is in dire financial shape and should be avoided for now. ...
14.12.11
OFZ MONITOR: 2011 Results
Primary Market This will be the last issue of the OFZ Monitor in 2011. Since its inception (27 July), the total returns of our recommendations have reached 2.72% (+294 bpts to the MICEX TR OFZ index). We hope our clients find the OFZ Monitor a useful tool and we wish them happy trades in the upcoming (and likely challenging) year. Observations and Recommendations Investors can currently achieve a 440 bpts premium over the REPO rate in a synthetic deposit by buying OFZ 26202 and selling OFZ2-3.12. The main constraint on this strategy is the limited liquidity of futures and the...
08.12.11
BLACK EARTH FARMING: Time for a Change?
We reiterate our negative view on the name: BEF has recorded negative EBITDA in 13 consecutive quarters to 3Q11 and we think its poor crop mix is to blame. While there are signs that BEF could eventually become profitable (it initiated changes in its crop mix in 2011), the company still faces a long and difficult road to prosperity. The full effect of crop mix changes will not be seen for several years: we forecast the company will generate an EBITDA margin of 23.8% in 2016 when 20% of its land is under sugar beets, the most profitable crop in...
07.12.11
OFZ MONITOR: Be Cautious about Rosy Expectations
Primary Market The OFZ 26206 issue was placed successfully but only in terms of formal indicators: 91% of the offered amount was sold, with a yield of 8.0% and an average price of 91.01. However, in reality we believe the placement involved an off-market deal given that the bond traded at 97.6/97.8 just after the auction (5-10 bpts higher in yield than the auction levels). We suspect that a major OFZ market participant may have bought a sizeable volume of the 26206 issue at an off-market price. Observations and Recommendations Yesterday we closed our positions in 25077s and 26203s with...
06.12.11
ATON TRANSPORTATION BULLETIN - 4Q11
Bulk or Containers? 4Q11 Results Should Show the Way. While it is difficult to provide a unified forecast for the sector due to its strong variability in terms of cycle exposure and growth stage, we expect growth to continue in 2012, despite the unstable capital market situation. In our view, 4Q11 results will be a strong indicator for the sector's performance next year: consumption-oriented container forwarders are starting to prepare for the New Year consumer buying spree, while bulk-focused companies are trying to tranship as much cargo as possible before the long Russian holidays....
06.12.11
MEDIA & IT DAY: KEY HIGHLIGHTS: Cyclical Stocks: Things You Need to Know in Good Time
Correction: in this note we stated on page 7 that “Yandex gained a 3-5% share of the Turkish market within a year.” This should read “Yandex could gain a 3-5% share of the Turkish market within a year”. Aton recently hosted a Media and IT Day. A series of one-on-one meetings were held with representatives of Russia’s leading listed IT (IBS Group, Armada), TV (CTC Media, O2TV) and internet companies (Yandex, RBC). To provide an alternative view on the Russian internet media market, we also welcomed the participation of two private internet venture companies, Fast Lane and Eruditor Group....
06.12.11
CONSUMER GOODS AND RETAIL: Refinancing Risk May Derail Short-Term Plans
Assessing the short-term threat to expansion plans. Russian consumer stocks have tumbled 36% since 1 Aug 2011, underperforming their EM peers as threats to the sector’s growth story sparked a rush to the exit. Given the potential for increased borrowing costs next year − domestic banks have already started raising their deposit rates and may soon start to hike lending rates − we decided to calculate the proportion of debt payments faced by Russian consumer companies in 1H12 that is covered by operating cash flows and cash on the balance sheet. We discuss the results of these calcu lations in...
05.12.11
ACRON: Hold Your Buys
With this report we downgrade Acron from Buy to HOLD on valuation grounds. We believe that Acron’s rouble bonds (yielding 8.32%) currently offer better exposure than its shares to the company in the mid-term. Stellar share price performance. Since the beginning of 4Q11, Acron’s share price has appreciated nearly 40%, beating both MSCI Russia (up 20% in the period) and the RTS (up 15%). We recall that the August-September decline on the Russian stock market wiped out half of Acron’s capitalisation, turning it into the cheapest fertiliser producer among its peers. We believe this undervaluation as well as certain corporate...
02.12.11
ATON METALWATCH - NOVEMBER 2011
This month we maintain our focus on costs. As we pointed out in previous reports (Remain Cautious as Costs Take Centre Stage on 17 Feb and our latest report Russian Steel - Not Stainless on 2 Nov) costs will continue to negatively influence steelmakers’ performances in the short to medium term. Margin pressure is increasingly evident if we examine the 3Q11 financials recently reported by Evraz and NLMK. We believe the financial performance of the remaining sector peers will demonstrate the same margin dynamics. Russian steelmakers boast a reasonably high degree of vertical integration vs their global peers, which...
01.12.11
Aton 2012 EQUITY GUIDE: Another Year of Risk Management
Aton 2012 Equity Guide: Another Year of Risk Management contains a summary of our reports The Known Unknowns (released 30 Dec) and Is Russia's Economy Heading Down a Cul-de-Sac (29 Dec). The report also contains 11 sector pages and 92 company pages (excluding prefs) with an investment summary, valuations, peer group comparisons, and target prices....
30.11.11
RUSSIAN EQUITY STRATEGY 2012: The Known Unknowns
A three-scenario approach. Forecasting the upcoming year is always a challenging assignment and rarely do we find ourselves approaching this task in such trying conditions. The obvious risk is that the shelf life of such a report can be very limited. With market conditions and investor sentiment fluctuating broadly on nearly a daily basis and opinions split over the future of Europe, the US, and China, we present three scenarios for 2012 on how the year may pan out and how investors should position themselves within Russian equities. Scenario 1: Oil price holds up despite ongoing troubles in Europe. In...
30.11.11
OFZ MONITOR: Interesting Levels among Mid-Term OFZs
Primary Market We shift to March OFZ futures as December’s will expire soon. We note that the OFZ2 basket has been changed and now contains the 25076, 25068 and 26202 issues. Moreover, the RTS has launched OFZ6, which is composed of long-term OFZs. The next OFZ auction is set for 7 Dec. Observations and Recommendations We close our spread deal (opened in September) with a loss of 2.1%. The curve shifted downwards over the mid-term, while in the short term it made no moves, which generated a loss in our long OFZ2/short OFZ4 position. Despite negative rating actions by S&P,...
29.11.11
A ROAD MAP FOR RUSSIA: Is Russia's Economy Heading Down a Cul-de-Sac?
A snapshot of Russia’s economy at YE11 will likely show a country with one of the most solid economies globally with a budget and current account in surplus, the world’s fourth-largest foreign exchange reserves and a negligible external debt position. And despite the precarious global backdrop, the oil price remains at around $110/bbl. However, looking longer term, we argue that this strength is deceptive and the aftermath of the 2008-09 crisis has exposed structural weaknesses and an economy more dependent on the oil price than ever. We do not aim to dismiss Russia’s economic future, but rather to outline the...
24.11.11
RUSSIAN OIL AND GAS 2012 OUTLOOK: Dividends Add Sparkle
Nothing is certain but death and taxes. As analysts and financial commentators battle to predict the market’s course in the midst of tremendous oil price, share price and global economic uncertainty, we offer six investment scenarios (four of which are the most conceivable), to suit a range of possible oil prices, levels of macroeconomic stability and geopolitical concerns. We also revise our ratings and target prices to incorporate recent sector changes while articulating the latest triggers and risks. Given expected volatility for the oil price, Russian oil and gas stocks, and the global economy, considerable doubt remains about how closely...
18.11.11
STRATONOMICS: NOVEMBER. Beware the Valuation Traps
Our metals and consumer teams have recently warned of the pitfalls of seemingly attractive forward valuations in their sectors, arguing that current levels might ignore the potential for consensus earnings downgrades. Below are MSCI Russia sector indices’ 12M forward P/Es today and their estimated values if consensus forward EPS on 1 July 2011 (i.e. before the start of downgrades) was slashed by 50% of the EPS reductions seen from the 2008 peak to the 2009 trough. Although probably too pessimistic, we find that materials currently look the most overvalued in the event of sharp earnings cuts. Telecoms and utilities appear...
17.11.11
ELECTRICITY DISTRIBUTION: RAB Implementation Flawed, Hopes Rest in Privatisation.
In this report we update our valuation of electricity distribution companies. We see good reasons for the market’s negative sentiments towards the sector: government intervention undermines RAB regulation, while RAB methodology is flawed and its violation by the regulators has had an increasingly negative effect on shareholder value. We cut our 12M sector MktCap target by 31% primarily on our more bearish stance on tariff growth and risks. Nevertheless at current price levels we still see significant upsides and rate 10 out of 14 electricity distribution stocks a BUY. Our top picks in the sector are MRSK Volga, MRSK Center...
16.11.11
OFZ MONITOR: Which OFZs are the Best to Short?
Primary Market As we expected the 26205 placement was weak: only 21% of the RUB10bn offered was taken up at 8.45%, a discount to the secondary market in terms of yield. We note that 26205 is not a very liquid instrument and demand at the auction might have been generated by investors covering shorts. Observations and Recommendations We do not expect a positive end to the month. Greece, the US Congressional budget vote and poor local liquidity are all potential causes of negative news flow. The best strategy for now would involve flattening the overall portfolio’s DV01 by shorting liquid...