FINAM - Daily Market Watch - Jul 9, 2010.
The Russian stock market ended the session lower on Thursday, shrugging off external bullishness, with the MICEX index shedding 0.5%. Oil & gas plays largely underperformed the market, despite a rally in world oil prices: Gazprom lost 1.0%, Lukoil eased 0.2% and Rosneft gave up 1.5%. Banking issuers followed the market lower, with Sberbank declining 0.4% and VTB ending the day 0.6% down. Metals were a mixed bag, with additional pressure on the sector coming from claims by the Federal Anti-Monopoly Service against a number of coal-mining companies: Raspadskaya closed 2.0% down, NLMK gave up 1.2%, Mechel advanced 1.7% and MMK was off 0.5%.
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Bullish trends prevailed on US stock exchanges on Thursday, with the S&P500 broad market index adding slightly less than 1%. Gained were led by resource-based stocks and consumer shares. Investors were cheered by rate increases in South Korea, which was taken as a signal that the global economy was on a recovery track. The ECB chairman also buoyed market sentiment by stating that economic recovery continued unabated. Asian stock markets are heading north this morning, with equity benchmarks adding about 1%. Bullish trends also prevail on commodity markets, with oil and base metals gaining in price. We view this morning's external environment as favorable for the Russian equity market and we expect the market to open higher, as investors will try to reverse yesterday's not quite grounded downside. Banking issuers stand a good chance to outperform the market, while metals may come under pressure from the claims put forward by FAS against a number of companies in the sector.
Oil settles above USD 75 on a major drawdown in crude inventories, rising demand and lower jobless claims. Light, sweet crude for August delivery settled at USD 75.44/bbl, up USD 1.37. Prices rose as much as USD 1.83 to USD 75.90, the highest intraday price since June 30. August Brent crude jumped USD 1.20 to close at USD 74.71/bbl on the London-based ICE Futures Europe exchange yesterday. Just as we predicted in yesterday's daily, inventory data pushed oil price back above the US 75/bbl mark. Crude stockpiles fell by 4.96 mn bbl last week, according to the EIA's weekly inventory report, far outpacing the consensus forecast, and nearly in line with the earlier API figure. Some of the bullish sentiment was tempered by EIA data which also showed US gasoline inventories unexpectedly rose by 1.32 mn bbl last week, although distillates showed a less-than-expected build of 321,000 bbl. Earlier, EIA raised its 2010 world oil demand growth forecast by 60,000 bpd from its previous estimate. The EIA now expects oil demand to climb by 1.56 mn bpd in 2010 to 85.82 mn bpd. Oil prices rose alongside equities markets on solid earnings from key retail chains, and after US Labor Department data on Thursday showed jobless claims fell more than expected last week, to their lowest level in two months. Also supportive, the Dow Jones Industrial average was up 0.51%, while the S&P 500 was up 0.20% in afternoon trading. Rising stock markets signal optimism about a continued economic recovery, which drives oil demand. On the economic front, the IMF lifted its 2010 global growth forecast on Thursday, citing expansion in Asia and in US private sector demand. The IMF raised its 2010 global output growth forecast to 4.6% from 4.2% after a 0.6% decrease in 2009. The IMF claimed that a double-dip recession is unlikely, which provided oil with a shot in the arm. Meanwhile, the US National Hurricane Center said a tropical depression headed for the western Gulf of Mexico was not likely to become a tropical storm, following warnings the depression could intensify. Also, a tropical storm warning in place for the lower Rio Grande valley along the border was expected to be lifted by the end of Thursday. Moving forward, yesterday's rally was moderate as the market realized the inventory decline was largely attributable to lost production spawned by last week's Hurricane Alex. Inventories are a key fundamental gauge for the oil market, but right now equities are more important. Thus, we will need to see some more seriously good economic data out of the global and US economies in order for prices to retrace to the USD 80 mark.
Fitch assigns BBB rating to Sberbank LPNs. Bonds worth USD 1 bn with a 4.499% coupon were issued within Sberbank's USD 10 bn LPN program and are to mature on July 2015. LPN proceeds are to be used to fund a loan to Sberbank, which has now been assigned the following ratings: long-term issuer default FX rating of BBB with a stable outlook, short term issue default rating of F3, individual rating of C/D, support rating of 2 and long-term issuer default support rating of BBB.
Gazprom to bring interest in Bosphorus Gaz to 71%. In 2009, Gazprom Germania acquired 20% of Bosphorus Gaz Corporation A.S. for USD 15.7 mn; however, as of late 2009, Gazprom Germania had not yet taken ownership over the share package, as it did not get a relevant authorization from Turkish authorities. Gazprom Germania currently owns 51% in Bosphorus Gaz, and will acknowledge control over the company with a relevant record in its financial statement only after its interest in the company grows to 71%. Bosphorus Gaz Corporation, based in Istanbul, Turkey, was founded in 2003. In 2004, Gazprom Germania became shareholder in Bosphorus Gaz. Gazprom's partners in the company are the Sen family (Ali, Adnan and Metin Sen are company board members) and Ringas Management B.V. In 2005, Bosphorus Gaz won a tender for resale of gas purchased by state-run Botas from Gazprom: Bosphorus Gaz has the right to resell on the Turkish market 750 mcm of Russian gas per year till 2021.
Shareholders of Raiffeisen International approve merger with RZB. The restructure plan provides for the spinoff from RZB of a segment that will work Austrian and international customers, and the further handover of its business decision to RZBs 100% subsidiary, Cembra Beteiligungs GmbH, which is to be further merged with Raiffeisen International Bank-Holding AG. The united bank is to get the name of Raiffeisen Bank International, and its shares are to be listed on the Vienna Stock Exchange. On July 7, the merger was unanimously authorized by RZB shareholders; now, the transaction is to be approved by relevant government authorities. The first time Raiffeisen and RZB hinted the possible merger was in February 2010. Supposedly, the transaction should make it possible to reduce redundancy, simplify risk management and diversify business. In Russia, Raiffeisen International operated as a bank of the same name, and a leasing and investment company.
FAS brings action against Evraz Holding, Raspadskaya and Severstal for coal price difference. The authority blames the companies for aeconomically and technically unfeasible price differences under coking coal concentrate supply contractsa. The differences among contractual prices under various coking coal concentrate supply agreements did not depend on either the contractual supply volume or transportation costs. In addition, the FAS suspects the companies of placing domestic customers in discriminatory conditions in comparison with foreign ones. The action was brought after the analysis of the domestic coking coal concentrate market carried out in January-March 2010. In line with estimates made by Rosinformugol research agency, the share of coking coal in total coal exports has varied between 9% and 13% during the last few years. In particular, of 107.8 mn tons exported in 2009, coking coal accounted for only 13.3 mn tons, or 12%. In total, domestic producers recovered 61.1 mn tins of coking coal in 2009, or 20% of the total Russian coal output. On addition, the FAS continues to monitor the situation with pricing at other large metallurgical companies: MMK, Severstal, NLMK and Mechel.
NorNickel calls Rusal to enter into dialog with Interros, but is not apt to support either party. aWe hope that our majority shareholders, Interros and Rusal, will finally reach compromise and enter into a constructive dialog. All managers and shareholder are ready to take all efforts to settle the situationa, MMC Norilsk Nickel reported. In addition, NorNickel does not agree with the accusations made by Rusal management and notes that the presence of CEOs on the BoD is a practice that is widely used in other global mining and metallurgical companies, which is conducive to the making of more weighted and reasonable decisions. Speaking about the unconstructive character of corporate disputes, NorNickel notes that formally, until its former BoD chairman, Alexander Voloshin signs the relevant minutes, decisions made by the BoD meeting cannot be deemed valid. Therefore, NorNickel is not able to pay out dividends for 2009 (RUB 210 per share according to Interfax). In reply, Rusal said: aOne cannot help but wonder, why NorNickel believes that the absence of Mr. Voloshin's signature means the cancellation of only one BoD decision, namely, the payout of dividends, and does not apply to other issues, including the election of a new BoD.
ECB keeps base rate unchanged at 1.0%
The ECB has left its benchmark interest rate intact at 1% in a sign that low interest rates will be maintained for an extended period.
The bank has also underscored economic revival in the Eurozone this past spring with the continuing moderate inflationary pressure, which should benefit global stock markets.
At the same time, we note the risks of economic slowdown in the Eurozone, due to planned cuts in state expenditures.
At a regular session on July 8, the ECB opted to leave its benchmark interest rate unchanged at 1%. According to the bank's chairman, the current interest rates adequately reflect the situation in the economy. At a press conference, the ECB chairman stated that the economy in the Eurozone was on a recovery track in 1H2010 and that economic revival was observed in the Eurozone this past spring. However, uncertainty over future economic recovery is still in place, but the risks are balanced, according to the ECB.
A faster recovery of the global economy, which would stimulate exports from the Eurozone, will prop up economic growth in Europe, while tensions on financial markets, the renewed growth in prices for oil and other resources, as well as protectionism, may act as restraints. Among other positive trends, we note a weakening of inflationary pressure in June. Inflation slowed from 1.6% in May to 1.4% in June on an annual basis. The ECB believes that the rate of inflation will be unstable and will show a tendency towards acceleration towards the year-end. Be that as it may, ECB expects the moderate pace of inflation next year, keeping its targeted rate of inflation at 2%. Information about economic revival in the Eurozone in the spring with the continuing moderate inflationary pressure evoked a positive response from investors, which has triggered a rally in world stock indexes and the appreciation of the euro. The ECB has made it clear that low interest rates will be retained for an extended period. However, we note the risks of economic slowdown in the Eurozone, due to planned cuts in state expenditures. Inflation is estimated to remain subdued amid a weak consumer demand.
Oil and gas
Gazprom Neft seeks to enter Bulgarian retail fuel market
Gazprom Neft is going ahead with its long-term investment program to expand its oil product distribution networks. However, on the Bulgarian market, the company may face stiff competition from Lukoil.
Bulgarian mass media reported on July 8 that Gazprom Neft was in negotiations with the Bulgarian Petrol AD over the purchase of a retail network, which encompasses 200 gasoline filling stations with a total price tag of around EUR 100,000. Gazprom Neft currently operates a network of 1,500 gasoline filling stations. Expansion of the network of gas filling stations fits into the company's long-term policy, adopted in 2009. On the face of it, the acquisition of a network of gas filling stations in Bulgaria looks like a logical step for Gazprom Neft, which owns 51% in the NIS Company in Serbia, which borders Bulgaria. NIS is an operator of the largest oil refineries in Serbia. Oil product deliveries from these refineries to Bulgarian gas filling stations could reinforce the vertical integration of Gazprom Neft. However, Bulgaria is home to the Burgas oil refinery, owned by Lukoil. The oil major also runs a network of gas filling stations in the country. According to our estimates, should Gazprom Neft set up oil deliveries from Serbian oil refineries to gas filling stations in Bulgaria, the company could lose out to Lukoil in terms of transportation costs. We do not expect the news to have any tangible impact on quotes for Gazprom Neft shares. However, should the company come up with a business plan that justifies this acquisition, it could have positive effects on the company in the long run.
Metals and mining
Korshunovsky GOK gets on with 85% capacity load
In June, Korshunovsky GOK ran at a moderate 85% capacity load, and the company does expect this level to change significantly this month. Low capacity load could put pressure on the company's 2Q and 3Q2010 financials. In the meantime, firm prices for iron ore concentrate could permit KOGK to post an EBITDA margin of over 50%.
In June 2010, Korshunovsky GOK (RTS: KOGK) shipped customers 350,000 tons of iron ore concentrate, Metal Courier reported July 8. The sales volume in June was almost the same as in May 2010. KOGK's annual productive output totals 5 mn tons; therefore, the company has run at 85% capacity during the last few months. Korshunovsky GOK claims it could export an even larger volume, but faced a shortage of railroad rolling stock. The company expects delivery volumes in July to be almost the same as in the preceding months. The regional sales pattern is unlikely to change much either. Relatively low capacity load could exert a downward impact on the company's 2Q and 3Q2010 financials. In the meantime, firm prices for iron ore concentrate are to permit the company to boost EBITDA margin to over 50%. We estimate the fair price for Korshunovsky GOK at USD 3300 per share with a 78% upside.
Sollers reports positive operating results for 1H2010
Sales by Sollers in June, which shot up 50% y-o-y, continued to outpace overall sales on the market, which were up 45%. The carmaker gains from its competitive pricing policy and a broad model range. We estimate the carmaker to boost sales by 26% in FY2010.
Sales of passenger cars and LCVs by Sollers climbed 29.4% y-o-y in 1H2010 to 32.196 units. In June, sales by the company shot up 49.9% y-o-y to 7, 770 automobiles. We estimate the operating results reported by Sollers as positive. Sales by the company in January-June (up 29.4%) outpaced average market growth (of 4.6%) by a large margin. A similar picture was observed in June, when sales by Sollers shot up 49.9% while overall sales on the market were up 44.8%.
According to our estimates, Sollers owes its above-average sales growth to a diversified model range, a competitive pricing policy and focus on production of SUVs. In general, 1H sales were in line with our estimates. The 1H data backs up our estimate of FY sales at 77.900 vehicles and we do not plan to alter our official estimate. Our 12-month target price for one common share in Soller, taking into account its planned JV with Fiat, is USD 36.4, with an upside potential of 161% and a BUY rating.
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