Russian stocks cheap as chips

Graham Stack for business new europe

Russian stocks were already cheap before a mammoth sell off cut the market capitalising in half in August. Analyst have run out of words to describe how inexpensive stocks have become.

Oil stocks are now cheaper than after the last big sell off in 2003 when the so-called Yukos affair started, “and this is at a time when the government is cutting taxes, not re-auditing them,” Renaissance Capital said in a recent note.

“We have a host of valuation indicators that show Russia to be as cheap, if not cheaper, than it has been since 2000, either in terms of absolute multiples or compared with emerging markets or global markets or Brazil,” says Renaissance Capital.

All the BRIC countries have been similarly hurt, but Russia, which started the year as a “safe haven” has come off worst. The Kremlin’s decision to break some domestic heads in the form of a crack down on metal and coke producer Mechel’s prices has proven to be bad timing. A very public row between shareholders in oil major TNK-BP only unsettled already jumpy investors further. Since mid-May, Russia has fallen 49%; so too have others. Brazil has dropped 41%, China has dropped 28% and India has fallen 17%.

Russia has fallen further than others, because of its greater exposure to the falling oil price. After disengaging from tracking the oil price in recent years in times of fear the market has gone back to fluctuating to every little quiver in the price of a barrel of the black stuff. And oil energy stock have fared event worse than the rest.

Likewise, banking stocks are dirt cheap as they are most exposed to the global financial crisis. According to investment bank Center Invest [sic], the market capitalization of several Russian banks is now teetering on the edge of falling below their book value – in other words banks are only worth as much as the money they are keeping in their vaults.

Two banks are actually worth less: Russia’s second largest bank, state-owned VTB Bank, hero of the world’s largest IPO in 2007 when it floated 22.5% for $11bn, now trades below its book value based on Bloomberg’s consensus forecast.

Moscow Industrial Bank is the second bank below the book. On a 2008E average P/E basis, Russian banks are valued at a 19% discount to emerging market peers. The discount extends to 27% fro 2009E, according to CiG.

IPNos in Russia

Russia’s 2007 IPO boom came to a shuddering halt in the first half of 2008, and nothing looks likely to change that in the second half.

The list is long of companies with plans to IPO this year that have now put them on ice: banking names such as UralSib, Gazprombank, KIT-Finans, AK BARS Bank and ZENIT Bank; and industrials such as AvtoVAZ and Sibur, Nitol Group, Acron and Mail.ru. In fact it’s easier to name the ones that actually happened in second quarter of this year; there was only one, rail operator GlobalTrans that IPO’d on April 30 raising $449m.

According to PBN Company, this translates into one second-quarter IPO compared to 10 in 2007, with a total value of second quarter IPOs in 2007 was $14.7bn, compared to GlobalTrans half billion. PNO vice president Artyom Dovlatov notes that the 2007 IPO result was exceptional partly due to two massive bank IPOs by VTB and Sberbank, the former the world’s largest in 2007, raising $8bn in May 2007.

However, it’s clearly not just the size of the offerings, but their number that has slumped, and there is a whole list of reasons for this.

Reasons to be cheerless

Alfa Bank’s Angelikia Henkel lists a dozen reasons why companies are postponing IPOs. First, according to Henkel, the tightening of international and domestic liquidity has made the global market for IPOs and secondary offerings less attractive.

Then come worsening conditions on international stock markets, with emerging markets dropping by 45% in some cases. Third, a sharp decline in M&A deals has made valuation of shares difficult for investors. Fourth, says Henkel, market structure has shifted in favour of private placements, with other forms of raising capital, such as pre-IPOs and private sales gaining in popularity ahead of IPOs.

Fifth and sixth, investor confidence in the banking sector has fallen sharply, and investors are also getting cold feet about investing in relatively small and unknown companies. Seventh, shares of companies IPOing in 2007 have mostly tanked, and, additionally, reason number eight, “People’s IPOs” of state-owned companies like Sberbank or VTB have temporarily been abandoned.

According to Henkel, higher bond yields have triggered an outflow to bond markets, while funds have preferred the secondary market to IPOs as soaring commodity prices boost the extraction sector. Eleventh, funds available on the IPO market have been absorbed by $6.1bn worth of power generation share placements of Russian power sector companies in first quarter 2008.

Twelfth and finally, according to Henkel, the sectorial distribution of offerings has changed: there is a shift towards relatively exotic sectors in the Russian context such as agriculture and Internet companies looking to raise funds, and investors feel less at ease with them.

This latter is a view shared by Ernst and Young Russia’s IPO department head Marchello Gelashvili, who expects “further diversification” to take place in the IPO market, “with diverse mid-sized IPOs’ showing” a rise in public offerings from companies in the technology, agriculture, infrastructure and engineering sectors.” And Deutsche Bank’s Yaroslav Lissovili also sees infrastructure and IT as the future IPO stars.

However, according to Troiika’s Mikhail Stiskin, with market conditions worsening, the next round of IPO activity is not likely to happen before 2009. Next up, and theoretically still on the cards, is the much anticipated IPO of Alisher Usmanov’s metals giant Metalloinvest, expected to float 25% in autumn 2008. “They are preparing for it, but it’s not going to happen in 2008,” says Stiskin. “Market sentiment is just too bad.”

As for the $4bn IPO of Mechel Mining, slated for second half of 2008, due to the handbagging Mechel received from Prime Minister Vladimir Putin for alleged transfer pricing, “this is obviously now not going to happen for another year or 18 months,” says Stiskin.

Russian IPOs back on the cards after slow first quarter

Graham Stack for businessnew europe

A roaring trade in IPOs last year hit a brick wall at the start of this one as the aftershocks of the US sub-prime debacle reached emerging markets. Stock markets sold off sharply and conditions were so stormy that almost all Russian companies with plans to float put them on ice. However, following the smooth transfer of power from Vladimir Putin to his friend and ally Dmitry Medvedev the markets have rallied and IPOs are back on the agenda.

May kicked off with a $449m GlobalTrans IPO for Russia’s first pure freight-train play, and concluded with two large internet IPOs announced for later in 2008 – the yandex.ru search portal and the mail.ru mail portal, valued at $5bn and $1bn respectively, according to financial daily Vedomosti. “In 2007, the surprise were the retail and real estate IPOs,” says Deutsche Bank’s Yaroslav Lissovilik. “Infrastucture is going to be hot in 2008, and that for me includes internet and IT.”

Commenting on the IT and internet IPO trend, Renaissance Capital’s David Ferguson says there is a whole cluster of IT companies, having crossed the $500m per year revenue mark, in line to IPO. “They all want to do it, and they come to us for advice, and we tell them they’re not ready yet, but they will be soon. They’re all on the path towards there.” Ferguson underlines it was the software programming houses, and not the huge, but hard to monetise, social networking sites such as odnoklassniki and vkontakte, that were most likely candidates.

Market sentiment on the mend

May saw a long-awaited stock market rally follow the inauguration of President Medvedev, making all-round conditions more palatable for new listings. As Troika Dialog’s strategist Andrey Kuznetsov notes: “Sentiment changed in May, with companies resuming IPO programmes after a first quarter that saw few placements.”

Artyem Dovlatov, vice president of PBN, agrees that the mood is definitively looking up, and is looking for significant developments in the third and fourth quarters. “The first quarter is never huge in any year, and this year the market conditions were also bad. Dovlatov says PBN, which provides consultancy services for companies considering IPOs, has several big names in our pipeline, with sectors to watch out for being retail, mining, telecommunications – “which all represent the economic diversification the government is aiming for.”

Dovlatov says that while the amount raised in IPOs this year will be less than in 2007, the exact amount is extremely difficult to predict due to uncertainty about whether monster IPOs such as aluminium giant RusAl will take place this year or not. He points out that the huge 2007 figure was largely down to two huge IPOs by Sberbank and VTB, each worth around $9bn. Kuznetsov’s overall forecast is for around $26bn-30bn; Deutsche Bank’s Lissovolik puts the figure nearer $20bn, a drop from 2007’s record of $30bn, but still up from 2006’s $15bn.

Troika lists among its top IPOs for 2008: Gazprombank, Mechel’s spin-off of Mechel Mining, and OGK-1 – each expected to raise around $2bn. But underlining how unpredictable the final figure will be, the top-three potential IPOs – RusAl, world’s largest aluminium producer (estimated $7.5bn), Megafon, Russia’s third largest mobile phone company (estimated $6.25bn), and metals and mining giant Metalloinvest (estimated $3bn) – are all interlinked through a succession of complex corporate intrigues. As such, it’s not so much the market conditions as how the oligarch-owners handle these machinations that will determine the timing of their IPOs.

Megafon’s long had murky final beneficiaries, rumoured to include Leonid Reiman, the former long-serving minister of telecommunications who lost his job in the May reshuffle. But Reiman’s departure from office, the mysterious disappearance in Latvia earlier this year of a bitter Reiman foe, former Megafon shareholder Leonid Rozhetskin, who left behind only a pool of blood in his home, combined with the sale of the disputed stake to Alisher Usmanov, owner of Metalloinvest, have now cleared the air for an IPO likely this year.

Usmanov also figures in determining two further potential major IPOs – of his own concern Metalloinvest, and of RusAl, due to both their involvement in the complex three-way M&A manoeuvring around nickel and copper giant Norilsk Nickel. Ongoing merger talks between Metalloinvest and Norilsk Nickel were paused May 28 to allow a Metalloinvest IPO in 2008. The Metallinvest IPO is intended to provide a market valuation for Metalloinvest, on which the merger terms with Norilsk will then be based.

Norilsk co-owner Vladimir Potanin and Usmanov have now invited Deripaska’s RusAl to consider a three-way merger. This in its turn muddies the water around the expected massive RusAl IPO. Analysts expect the RusAl IPO to only happen after the Norilsk tie-up is in the bag, so not in 2008 as originally expected. “The whole market is waiting for the RusAl IPO,” says Dovlatov, “that’s when its going to get really interesting.”