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 was busy reviewing and revising construction contracts which it inherited from the previous administration, which resulted in the tendering of only 60-70% of the planned projects, on our estimates.
Down and out... As a result, Mostotrest’s stock performance was weak in 2011: its share price fell 26% while the RTS and MSCI Russia lost a respective 22% and 21%. Year-to-date, the stock has also been weak and is up 8% while both the RTS and MSCI Indices have added 17%.
...but the outlook appears promising. We expect a series of large-scale projects to be tendered in 2012. Much like a stopped-up ketchup bottle given a vigorous shake, we believe that Moscow will unleash its ambitious spending programme on transport infrastructure this year. According to the city’s latest transport strategy for 2012-16, total spending on highways should double YoY in 2012 to $8.2bn and grow to $9.8bn in 2013 and $12.8bn in 2014.
A few short-term risks inside a compelling long-term opportunity. The Russian economy is facing a challenge: how to balance its own growth against the murky situation unfolding in the EU. We believe that amid global stock market woes, Russian second-tier equities will lose their investment appeal (due to poor liquidity). With the overall situation in mind we prefer to err on the side of caution and increase our WACC estimate for Mostotrest from the earlier 12.0% to 14.5%.
BUY Mostotrest. Russia’s need to invest in transport infrastructure becomes obvious to anyone who ventures more than 100km from Moscow. We therefore argue that though a massive undertaking, a turnaround in domestic transport infrastructure is imminent – we see this more of a matter of time than of money. Recent news that Gennady Timchenko’s StroyTransGaz is close to acquiring a blocking stake in another major transport infrastructure builder, SK MOST, may imply that the industry has yet to unleash its potential. And as Russia’s leading provider of turnkey transport infrastructure construction services we believe that Mostotrest will remain the main beneficiary of this turnaround. Our new 12M target price of $8.8/share implies a healthy 37% upside potential and we continue to rate Mostotrest a BUY.
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