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FINAM - Daily Market Watch - Aug 9, 2010.

Market Roundup

Russian stock indices were on a downward trend on the last day of last week, following commodity markets lower. The RTS index shed 0.5% and the MICEX index ended 0.8% lower. The banking sector acted as a top decliner, with VTB losing 1.2% and Sberbank easing 1.8%. Oil & gas plays headed down, as Gazprom and Lukoil both shed 0.1% and Rosneft dipped 1.1%. Metals were also on the way down amid falling base metal prices: Severstal inched down 0.1% Norilsk Nickel gave up 1.5% and NLMK dropped 1.8%. Prime stocks in the power utilities sector showed mixed trends: RusHydro shed 0.2% while the results of trade in OGK shares ranged from -2.4% (for OGK-4) to +0.8 (for Enel OGK-5). TGK-9 (up 4.4%) led gains among liquid names last Friday, while telecoms operator MTS closed flat.

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The S&P 500 index dipped 0.4% last Friday. Oil & gas stocks conspicuously underperformed the market, losing an average 1.2%. The Japanese Nikkei 225 index is trading 1.0% lower on the yen appreciation caused by investor concerns that economic recovery in the US and Japan could slow down. Oil is on the rebound after Friday's fall, with WTI oil contacts trading at around USD 81 per barrel. Base metal prices are little changed, showing mixed trends. We do not expect the release of high-profile statistical data in the US today. Looking towards economic statistics in the Eurozone, we mark out the Sentix Investor Confidence Index, due out at 12:30 pm. In our view, the absence of significant statistics from abroad against the backdrop of strong commodity prices spells a fairly calm trading session. A moderate rally in the Russian stock market is quite possible, as is indirectly confirmed by RTS index futures, which are trading 0.1% higher.

Breaking News

Oil ends the week above USD 80 despite a weak US jobs report.

Light, sweet crude for September crude tumbled USD 1.31, or 1.6% on the NYMEX to settle at USD 80.70/bbl, while September Brent crude oil declined USD 1.45, or 1.8%, to end the session at USD 80.16/bbl on the London-based ICE Futures Europe exchange. Crude oil futures moved lower for a third straight day on Friday, weighed down by a bleak US jobs report. Nonetheless, we were fairly surprised to see that prices held above USD 80 and ended the week higher, as oil's losses were tempered by the dollar's slide and weakness against the euro. Prices plunged 1.6% after the Labor Department reported that private payrolls that exclude government agencies rose by 71,000, less than forecast, after a gain of 31,000 in June that was smaller than previously reported. Crude prices managed a weekly gain, up USD 1.75, or 2.21% from the previous Friday's USD 78.95 settlement, after retreating from a threemonth high above USD 82 on Tuesday. A low pressure system in the central Atlantic Ocean had a medium, 40%, chance of strengthening into a tropical depression over the weekend but was not likely to threaten the Gulf of Mexico, the US National Hurricane Center said heading into the weekend. China's leading refineries are expected to process the same volume of crude oil in August as they did a month earlier, as planned increases in runs in some plants would be offset by cuts in others. Moving forward, despite the obvious dismal job numbers the bottom line is that oil managed to stay above the USD 80/bbl mark. We expect prices to regain momentum from earnings this week and move back to USD 83 and possibly reach USD 85 by this fall.

Russia's foreign reserves total USD 475.4 bn as of August 1.

Russia's foreign reserves as of 1 August 2010 totaled USD 475.3 bn, versus USD 461.2 bn on July 1 and USD 439.45 bn on 1 January 2010, CBR reported. More specifically, currency reserves totaled USD 448.04 bn, FX reserves equaled USD 437.44 bn, SDR accounts amounted to USD 8.62 bn, Russia's reserve position with the IMF stood at USD 1.68 bn, and monetary gold equaled USD 27.26 bn.

Russia reserves RUB 10 bn for Abkhazia and South Ossetia.

The Russian federal budget for 2011 allows for a RUB 10 bn provision for the friendly republics of South Ossetia (RUB 6.8 bn) and Abkhazia (RUB 3 bn), primeminister Putin said at a meeting with first vice-PM, Igor Shuvalov. aWe should make for a corresponding provision in the 2011 federal budget, and I ask you and your colleagues to work out proposals, as to which particular objects located in the two republics may require the fundinga, Putin said. Shuvalov replied that the government had already worked out base infrastructure projects for South Ossetia worth RUB 3 bn, but the South Ossetian president and government had already appealed to Russia with a request to raise the funding amount, as the republic needed more infrastructure facilities. aThe have pledged to devise all the relevant projectsa, Shuvalov said. aI uphold their proposala.

Rosneft to settle accounts with Yukos Capital on August 9.

On August 9, Rosneft is to transfer more than RUB 13 bn to Yukos Capital S.a.r.l., controlled by Yukos ex-managers. Yukos has already filed a relevant claim to Rosneft's warrantor-bank; however, Rosneft attempts to block the money transfer: structures, affiliated with the oil company, have already triggered judicial proceedings, which may end in claim against Yukos Capital itself.

Alrosa acquires Timir.

Alrosa has acquires 99.9% of common shares of MMC Timir. Mining and metallurgical company Timir was founded in 2008 in Neryungri, Yakutia, and is involved in the development of a geological survey for South Yakutian iron ore deposits. Timir's primary shareholder is Alrosa Investment Group.

Naftogaz pays off amount due to Gazprom.

Naftogaz of Ukraine has remitted to Gazprom some USD 780 mn for gas imported to Ukraine in July 2010. Gas prices for Ukraine in 3Q2010 have been set at USD 248 per tcm. In line with the terms of a supplementary agreement to the base contract between the companies, signed 21 April 2010, prices for natural gas shipped to Ukraine are defined with regard to a USD 100 discount per each 1000 cu.m.

FFMS halts LSR additional issue.

The FFMS has halted the issue of LSR Group's uncertified common shares (registry number 1-01-55234-[ETH]-002D of 8 April 2010). The issue size was scheduled at 9,366,383 shares with a par value of RUB 0.25. The decision to stop the issue was due to technical problems, discovered at a stage of the registration of an additional securities issue report.

Oil and gas

Tatneft agrees on 2.75% loan interest rate cut The reduction in the loan interest rate should permit Tatneft to save over USD 40 mn annually for the next three years. That the company has managed to have its interest rate cut may send a positive signal to investors in Tatneft shares.

Tatneft has agreed on having its interest rate on a USD 1.5-bn syndicated loan cut, the oil major announced on August 6. The loan was taken in the autumn of 2009 and consists of two portions, a three-year tranche originally released at LIBOR+5.85% and a five-year tranche originally provided at LIBOR+6.85%. The oil company has managed to cut the fixed part of the rate by 2.75 pp on both tranches, to LIBOR+3.1% and LIBOR+4.1%, respectively. According to our estimates, the rate cut is to ensure Transneft two positive effects at one time: cost savings and risk abatement. To begin with, the company will be able to economize USD 41.25 mn annually for the next three years and an undisclosed sum for two years thereafter (the company would not divulge the value of the five-year tranche). To add to this, the rate cut is a strong signal the oil company has the same level of risks as Russia's largest oil companies, which have proven their ability to draw loans on the cheap over the past year. Tatneft will direct the entire loan toward the construction of the Nizhnekamsk oil refinery, the first section of which is scheduled to open at the year-end. The consent by the banks to lower the cost of the loan may be indicative of the progress made on the construction project, the way we see it. We expect the news to have positive effects on quotes for Tatneft shares, both in the short and long terms, thanks to improvements in the company's creditworthiness.


Kopeika plans to float RUB 1.6 bn of additional shares We believe that the additional capitalization of Kopeika, via the attraction of additional liquidity, will raise its appeal ahead of its planned purchase by [ETH][yen]5 Retail Group, which is important in view of the relatively high valuation of the company.

It has become known that Trading House Kopeika intends to raise its capital by 5% through the floatation of 134.2 mn additionally issued shares. The shares will be placed at RUB 11.7 per share by closed subscription for the benefit of the Uralsib management company. The total worth of the issue is estimated at RUB 1.57 bn. In our view, the additional capitalization of Kopeika relates to its planned purchase by [ETH][yen]5 Retail Group and the goal pursued by the trade house is to raise its appeal ahead of the planned deal. According to available data, Kopeika was valued at RUB 50 bn (taking into account its debt), which, along with its estimated EBITDA of RUB 3.85 bn for 2009, translates into the historical EV/EBITDA ratio of 13.0 (vs. the industry average of 11.0). The company also has an EV/Sales 2009 ratio of 0.9, against the industry average of 0.7. In our view, the company is valued fairly highly on its historical financial ratios. However, the acquisition of a network of around 600 stores will permit [ETH][yen]5 to meet two goals at one time, including removing one of its chief rivals in the discount store segment and boosting its market share to 10% in the promising Moscow region, which explains the company's readiness to pay a fairly high price for the asset. Given the above, we estimate the news as positive. Our fair price for one depository receipt of [ETH][yen]5, estimated using a market peer valuation approach, is USD 31.1, which implies a downside potential of 16% from the current stock valuations.

Grigory Yudashkin

Deputy Head

Private Investments Department

Finam Investment Holding

Daev Plaza Business Center

Daev Lane 20, office 209

Moscow, 107045, Russia

Tel: +7 (495) 604-8168

Fax: +7 (495) 604-8107

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Publication:Russian Banks and Brokers Reports
Date:Aug 9, 2010
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