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FINAM - Daily Market Watch - Dec 30, 2010.

Market Roundup

On Wednesday Russian equity benchmarks showed mixed trends: the RTS sank 0.1% and the MICEX index gained 0.8%, as the ruble lost ground against the dollar. Metal blue chips left the broad market far behind: Norilsk Nickel specifically surged 6.0%, Severstal added a healthy 1.6% and NLMK jumped 4.0%. Robust growth in the sector was fed by corporate news, including information about a buyback by Norilsk Nickel. Power utilities ended the session on a positive note, as RusHydro added 0.7%, OGK-1 rose 1.3% and Enel OGK-5 advanced 1.2%. Moderate growth rates were recorded in the oil & gas sector, where Rosneft edged up 0.7% and Lukoil climbed 0.2%. Gazprom was a case apart, shedding 0.9% of its value in a downward corrective move. The banking sector saw losses yesterday, with Sberbank pulling back 0.3% and VTB sliding 0.6%. Telecoms trended up, as MTS added a modest 0.2% and Rostelecom soared 4.0% on news about the successful completion of another stage of its reorganization.

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Trading on the US stock market was relatively calm yesterday, with the S&P500 index adding 0.1% by the final bell. The market was led higher by oil & gas stocks, which gained 0.8% on average, overtaking all the other sectors on the market. Asian equity benchmarks are trading mixed on a tougher monetary policy by Chinese authorities. The Nikkei 225 index is shedding 1.1% on the significant yen appreciation. Oil is little changed, with WTI oil contracts trading at USD 91.3 per bbl. Base metals are gaining in price. In particular, copper prices are approaching local highs on growing investor confidence in global economic recovery.

We regard the external climate on the last working day this year as relatively calm, which may be conducive for moderate upside in Russian equity benchmarks. Metal blue chip shares could outperform the market today. As for market drivers, the current US labor stats are due out at 4:30 pm and the leading indicator of US home sales in November is due at 6:00 pm. The Spanish current account for October is expected during the day and the Italian Entrepreneur Confidence Index for December is due at 11.30 am.

Breaking News

Aeroflot cannot predict when cancelled flights will depart.

Aeroflot cannot guarantee that cancelled flights will depart. aWe are note able to guarantee that your flight will depart tomorrowa, the airline information desk said in response to the question whether the flight to Munich, cancelled December 29, would depart on the next day. aOf course, we must put you on flight; however, there are no more vacant seats on board, and hence no guarantees you personally will flya, the airline stated. Moreover, Aeroflot cannot say what passengers of cancelled flights should do, and when they will be able to fly to their points of destination. At the same time, the Sheremetyevo airport reported that, as of 6:30 pm MSK December 29, all flights, both foreign and Russian airlines, were being made on schedule (the timetable had been amended with regard to earlier delayed flights). The airport also could predict what would happen with Aeroflot flights: aPassengers of cancelled flights are waiting for departure and are to be flown to their respective points of destination in the foreseeable futurea, the airport reported.

Retailers attribute upsurge in Christmas sales to trade area extension and increase in number of stores.

Russian retailers note an upsurge in Christmas sales in comparison with December 2009; however, some of them attribute the sales growth not to increased buying activity, but to the development of retail networks, which have actively enhanced their trade areas and have opened new stores in 2010. aEverything is as usual; seasonal fluctuations are the same as in the last year, and we have registered no particular bursts: sales in 4Q2010 have increases as quickly as in 2009a, Dixy IR director, Olga Popova said. Instead, she attributed the sales upsurge to business expansion and the increase in the number of stores. aPositive changes are due to the company's devoted business-streamlining effortsa, Magnit IR director, Oleg Goncharov said. aLFL sales have jumped, but not because of insatiable consumer demand. The real reason is optimization measures taken by the companya, he added.

RusHydro finishes construction of Egorlyk HPP- 2.

RusHydro has reported that it has finished construction of the Egorlyk HPP-2 in Stavropol Territory. The new plant is part of RusHydro's local branch, Kuban HPP Cascade. The power stations four energy units, with a 14.2 MW cumulative capacity, have successfully passed combined and commissioning tests, including idle run, the genco said. As of now, energy units 1 and 4 are powered on, ready for launch, and have beep put at load. The remaining two energy units are to be powered on in accordance with the Plan for Water Intake Though Channels of Upper Kuban in a pass-through mode. The Egorlyk HPP-2 is one of RusHydro's top-priority projects in the Northern Caucasus. The power plant construction was financed out of the company equity funds. Total investment in the project amounted RUB 2 bn. After the station is launched, electricity output at the Kuban HPP Cascade should increase by 55 mn kWh. According to RusHydro, the successful execution of the Egorlyk project could enable it to not only use the power-generating potential of transit water flow, but to resolve important regional environmental issues.

Putin still committed to merging Gazprom with Naftogaz.

Putin has confirmed he is still committed to merge Gazprom with Naftogaz of Ukraine. I do not consider this idea as somewhat outlandisha, the Prime Minister said. aOn the contrary, I regard it as fairly sensiblea, Putin told journalists on December 29. He recalled the idea to merge Gazprom and Naftogaz had been mooted by him. aIf we approach the issue without emotion, then, of course, Naftogaz will be a minority shareholder in the united company. However, the enterprise promises to become the world's largest gas company, and a part of it will belong to Naftogaza, Putin noted. He underlined that Naftogaz would have a strong vote at the company, which would always be heard. In addition, the Prime Minister noted Naftogaz could participate in joint operations with Gazprom, including production. aThis is not senselessa, Putin summarized.

Marat Safin quits Zenith Bank share capital.

Marat Safin, son of Altai senator, Ralif Safin, has sold off its 6.8% package in Zenith Bank. Rodilla Investments Limited, where Safin is the main beneficiary, has sold its 6.799% interest in Zenith to Viewcom Finance Limited. According to the information about the bank end beneficiaries, published on its website, Viewcom belongs to Alexander Proshechkin. The bank refused to comment on the issue. Safin was member of Zenith BoD from 2007 to 2009, but does not currently sit on the board.

Banking sector

VTB seals primary deals with Transcreditbank

If the first phase of the M&A deal between VTB and TCB ends this month, VTB could get a chance to consolidate a controlling package in Transcreditbank as soon as 1Q2011. In our opinion, the scheduled acquisition price is favorable for both VTB and its shareholders.

On December 29 and 30, VTB reported it has successfully completed the initial two stages of the M&A transaction with Transcreditbank (TCB). In bulk, VTB has acquired 41.7% of TCB shares. We regard the news as moderately positive for VTB and believe it could buy a controlling interest in TCB as soon as 1Q2011 and get a chance to consolidate the bank results on its books. VTB management has scheduled the ultimate transaction value at 2x TCB equity, which is quite inexpensive for a bank with an over 25% ROE. VTB now trades at 1.7x its 2011 BV and has an anticipated 2011 ROE of 13%. Our 12-month target for VTB (RTS: VTBR) is USD 0.0038 per share with a HOLD rating.

Electric Utilities

MRSK Holding floats additional issue In our opinion, the news has already been priced in.

On December 29, MRSK Holding (RTS: MRKH) reported it had successfully floated 1.92 mn additional shares at RUB 4.14. The placement proceeds thereby totaled almost RUB 8 bn. The company's share capital has increased by 4.5% and now consists of 42.96 mn common shares; the amount of preferred stock has stayed unchanged at 2.08 bn. We recall the additional issue was triggered in May 2010 with an eye to raise funds for Olympic projects; however, after the Holding BoD summarized the results of the shares preemptive buyout in August and found out only 55% of the issue had been bought, predominantly by the state, it decided to extend the bidding term till November 26. As a result, in late October, the Duma decided to buy up one more lot of MRSK Holding additional shares worth RUB 1.7 bn: the money is to be directed to the rehabilitation of electricity supply to the Raspadskaya mine, damaged by the May '10 blast. The remaining 24% of the additional issue has also been successfully placed, MRSK Holding reported December 29.

In general, the news about the full placement of the Holding MRSK additional issue has come as no surprise: everybody was free to participate in the share placement; moreover, since the second half of September, the security market value has consistently been above the additional issue price. Given that the issue volume is relatively small, we do not expect the event to involve any huge risks of the holding minority interest being diluted. In addition, the government's interest in the company has inched up just moderate 1 pp to 53.7%. We regard MRSK Holding as the most liquid instrument in the distribution grid segment, which allows investors to hedge risks characteristic of other MRSK securities. Our rating for both MRSK Holding commons and prefs is BUY, with respective target prices at USD 0.25 and 0.15.

Metals and Mining

Norilsk Nickel comes up with program to raise market cap

Norilsk Nickel has approved a share buyback program, worth USD 4.5 bn, and has already started its opening phase, during which 6.2% of shares are to be bought out at USD 252. Our estimates show that investors may count on at least 8.3% of their bids for buyout to be satisfied. Despite the short-term positive effect and the potential contraction of the discount of the shares to depository receipts, we believe that this decision has a number of fundamental negative implications and we expect that the shares could experience a shortage of drivers in the mid term.

On December 29, Norilsk Nickel reported the approval of a program to raise its market cap, which, among other things, entails the buyback of shares worth a total of USD 4.5 bn for the next 12 months. On the same day, the company announced the start of a share buyback program for the buyout of 11.6 mn shares (6.2% of the stock) at a price of USD 252. Bids from shareholders will be accepted until January 21.

The stated buyout of shares with a premium to the market has already had a short-term effect on quotes for company shares, but in fundamental terms, the move has a number of negative implications. Firstly, the decision on a share buyback actually means the derailment of talks with Rusal and the continuing conflict between company shareholders. Secondly, the shares bought will not be redeemed, as the main goal pursued in the share buyback is to strengthen the hand of the Interros-management alliance. Finally, this procedure lowers Norilsk Nickel's effective free float.

According to our estimates, Rusal will not participate in the share buyback to hold on to its blocking stake in Norilsk Nickel, which gives minority shareholders the grounds to count on at least 8.3% of their bids to be met. Should Interros and Trafigura also abstain from taking part in the buyback, no less than 15% of all the bids from minority shareholders could be satisfied. We should also note that the current market price of the depository receipts, which make up 27% of the company's capital, is close the stated buyback price, implying that up to 20% of all the bids could be met under a bestcase scenario.

We think that the possible way to resolve the shareholder conflict at Norilsk Nickel through the buyout of Rusal's blocking stake has been missed. All of the potential short-term upside drivers, in the form of a share buyback and the sale of non-core assets, have also been realized and Norilsk Nickel shares could encounter a shortage of drivers in the short term. Although the upside potential to our target price still corresponds to a BUY rating and the short-term contraction of the discount of the shares to depository receipts is still quite possible, we believe that investors may see more attractive price levels for purchase in upcoming months.

Development

Court to reconsider PIK Group's suit, seeking recovery of RUB 1.6 bn overdue debt from shareholder

In view of the protracted nature of the case, we doubt the court will come to a final decision on it today. Against this backdrop, a slump in PIK Group stock valuations over the past few trading sessions looks unjustified. On the contrary, we believe the developer's stock should increase, if the court adjudicates to the company benefit.

On December 30, the Moscow Arbitration Court (MAC) is to consider a suit filed by PIK Group, seeking recovery of RUB 1.6 bn under an overdue loan from LLC Quinturin, a structure affiliated with one of its shareholders, Yuri Zhukov, who owns 17% of PIK equities. The RUB 1 bn loan at issue was granted to Quinturin on 12 April 2006; the RUB 600 mn surplus accounts for accrued interest and forfeits.

We believe PIK is over the worst now, and the situation should only change for the better if the company gets its money back. However, PIK Group shares have eased over 7.5% during the past few trading sessions, and on December 29, the security was the top loser on the MICEX, with the benchmark rising by 0.8%. We regard the slump as unjustified, as there is no doubt the court will adjudicate to the benefit of PIK. This assumption can be confirmed by several indirect factors; for example, some of Quinturin assets have been put under arrest as a means of interim relief in the suit. Since the proceedings have been dragging on (the case has been at court for more than 12 months), we do not expect the court to take a final decision on the case today. Our attitude to the eventuality is neutral. Our year-end 2011 target for PIK Group (RTS: PIKK) is USD 7.70 per share with an 87% upside and a BUY rating.

Transport

NCSP releases expectedly negative 3Q2010 financials

NCSP saw further revenue contraction in 3Q2010, along with the fall in cargo turnover, which accelerated due to the imposition of a ban on grain exports. The service costs also increased, despite a weakening of the ruble. These factors have adversely affected the company's profit margins. We estimate the quarterly results from the company as expectedly negative.

On December 29, the Novorossiysk Commercial Sea Port released IFRS financials for January-September, 2010. 9M2010 revenue declined 1.7% y-o-y to USD 499 mn, leaving EBITDA of USD 344 mn, down 0.7% y-o-y. NI was USD 233 mn after increasing by 12% y-o-y. We have analyzed the 3Q results from the company, which are fresh for the market, and estimate them as moderately negative, and we point out the following negative trends:

12.5% revenue contraction q-o-q, caused by the 6.5% fall in the cargo turnover. The company says it has lost USD 7.0 mn in potential 3Q revenue due the ban on grain exports alone. Due to a slowdown of cargo turnover, revenue from provision of additional services dropped 4.9% in 9M2010, against the 3.9% contraction of cargo turnover.

2.0% increase in service costs q-o-q, against 12.5% revenue contraction and the 1.3% dollar appreciation. In ruble terms, service costs grew 3.3% q-o-q.

Operating margin decreased by 9.9 pp to 52.9%, along with a contraction in revenue and a rise in service costs. On the positive side, we point out that:

The adjusted administrative expenses remained at a 2Q level. Upon analyzing administrative expenses, we have made adjustments for the reversal of impairment losses from the devaluation of the advances issued for the acquisition of fixed assets and uncompleted construction sites, which was made in 2Q, and the shrinkage of the contingency reserve in 3Q.

NI rose 8.1% q-o-q, despite the decrease in operating income. 3Q NI rose on a USD 5.0 mn gain in interest income on deposits and USD 15.4 mn in FX gains. Our 12-month target price for NCSP common shares is under review, due to the merger with the Primorsky Commercial Seaport.

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

E-mail: yudashkin@finam.ru
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Publication:Russian Banks and Brokers Reports
Date:Dec 30, 2010
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