Uralsib - Russia Daily Equity Update - Jul 16, 2010.
Investors likely to wait on the sidelines.
Investors will be relieved that US markets reversed early losses to close almost flat, though any price rally will be very limited due to Asian market weakness and concerns about Google's weaker-than-expected results. It was a day of very mixed signals in international markets yesterday, with several positive and negative indicators almost balancing each other out. The weaker-than-expected Empire State manufacturing report led to a big opening slump in Wall Street, which also pulled global markets lower, including Moscow. The settlement deal between Goldman Sachs and market regulators allowed for a late bounce, while Google's after-hours results hit futures and contributed directly to the weakness across Asia today. Investors are therefore more likely to wait until today's indicators are released to see whether they should be slightly more optimistic or pessimistic going into the weekend. The University of Michigan sentiment report will show whether US consumers are feeling more or less confident, and is one of the reports to which the market pays a lot of attention to. Bank of America and Citigroup will report their numbers early today.
(To view the full report please click here:
Light volumes. Moscow's exchanges opened with some optimism yesterday, but the morning strength was quickly reversed when global markets started to decline. The MICEX fell over 2.5% from the session high to close at 1,340.2, a net fall of 1.4% for the day. The London IOB index fell 0.7%. The weaker-than-expected June Industrial Production report also hit sentiment towards Russian stocks. While the number is still strong (up 9.7% YoY), it was less than the 11.7% expected by economists. Unless the number picks up in the coming months, the more optimistic forecasts of 5% GDP growth this year may have to be scaled back. Consumer activity indicators in particular are still weak, and while we expect only a slow pick-up in retail sales this year, current indicators remain low. Trading in most Russian names was typical of summer activity, with relatively light volumes and no major changes.
Inflows back, but not everywhere. Emerging Portfolio Fund Research reported increases in net inflows to all EM funds, which totaled $3.1 bln for the week to 14 of July, compared to the previous week's $618 mln. Most increases were in GEM funds, with $2.1 bln of inflows versus the previous week's result $517 mln. Asia funds also showed strong performances, as investors put in a fresh $817 mln versus $124 mln a week earlier. However, despite global markets' performances, LatAm and EMEA funds saw almost no improvement. LatAm funds saw inflows of $122 mln, versus the previous week's outflows of $16 mln. EMEA funds attracted $40 mln versus outflows of $8 mln a week earlier.
Russia was an outsider. Players finally started to invest as markets continue to rise for a second straight week, though not all regions and countries where high priorities. Still there is much uncertainty regarding the global economy, and we are now in the low-activity season. China fund inflows increased to $322 mln, or 0.44% of the total portfolio, from the previous week's $7 mln. India funds saw inflows of $114 mln, also 0.44% of the total portfolio. Brazil funds continued to compensate for their long-lasting outflows, with investors putting in $97 mln, or 0.52% of the total portfolio, compared to the previous week's $25 mln. Meanwhile, Russian and CIS funds were not investment priorities this week. Players added a total of $5 mln, or 0.05% of the total portfolio, which is not bad considering the previous week's $28 mln outflows, though this was rather poor compared with the portfolio's growth for the week of more than 3.3%, or $352 mln.
Trust is back?
The past week's market turbulence had dwindled as commodity prices were restored. The strong start to the reporting season also provided necessary support to the markets, with investors discarding their fears and starting to invest. Hence, should the positive trend continue, we expect further improvement in inflows despite the low activity.
Industrial production falls in June; no apparent reason for trend reversal
Monthly industrial output numbers below expectations a[bar] Yesterday Rosstat reported that industrial output was down 0.4% MoM in June but up 9.7% YoY. Industrial production continued to recover in 2Q10, rising 3.9% QoQ. June industrial numbers were less then our estimates and the consensus (both 12.1% YoY) due mainly to seasonal factors and weak performance in commodity production.
a[bar] but manufacturing industries are still recovery drivers. Industrial output increased 9.7% YoY despite the decrease in June, led by manufacturing industries, which grew 14% YoY, with commodity production up 4.4% YoY and utilities industries up only 2.3% YoY due to seasonal factors. Gross mining output increased 4.4% YoY on the back of rises in coal production (up 1.6% YoY) and iron-ore concentrate (up 6.4%). Natural gas production rose 19.7% YoY due to a considerable decrease in output in 1H09 and as a consequence of the low-base effect.
Rising demand supports output in consumer industries. Manufacturing industries again posted solid gains, due mainly to improvements in consumer demand (food, clothing, and textiles output again demonstrated strong numbers), state support (the state-sponsored acash for clunkers' scheme was prolonged), and it being the building season (especially relevant for the private sector). The main reason for the weak June numbers were a decline in demand in coal production due to seasonal factors and the Raspadskaya accident and resultant Rostechnadzor inspections, which led to idle mining capacities. We see no reason to change our view on industrial growth prospects; we expect the industry to grow 8.1% YoY this year.
Producer prices down 3.1% in June
PPI down 3.1% in June a[bar] Producer prices in Russia decreased 3.1% MoM in June after rising 2.7% MoM in May, though on YoY basis PPI is up 9.8% YoY. The decrease contrasts with our expectation of an 0.8% MoM increase and the consensus 1.5% MoM rise.
a[bar] led by fall in commodities prices. The main contribution to PPI decrease was made by commodities, with prices down 10% MoM, with a slight decrease in the manufacturing and utilities sectors. The largest decrease was recorded in light distillates, with prices down 17.5% MoM. Oil prices dropped 12.5% MoM and gas condensate prices fell 7.2%. This was due to seasonal factors, as well as, we believe, excessive domestic supply due to high export duties in June.
We expect higher PPI and CPI by year end. June's decrease brought the PPI down 9.8% YoY after reaching a 19.1% YoY growth rate in May, and we expect it to total 13.8% YoY by the end of the year. We remain cautious on inflationary trends in Russia, and forecast a gradual acceleration in CPI growth from 5.8% YoY in June to 7.5% YoY by December.
2Q10 trading update: cautious 3Q10 outlook
Steel output increases 6% QoQ. NLMK (NLMK - BUY) yesterday issued good 2Q10 operating results. Crude steel output increased 6% QoQ to 2.9 mln tons, implying a group utilization rate of 98%, with the main Lipetsk site at 100% load. Overall, group sales volumes were up 4% QoQ, with slabs down 18% QoQ, flat products up 9% QoQ, and long products down 5% QoQ. Volumes of high value-added products were also strong: galvanized steel was up 68% QoQ and pre-painted steel was up 24% QoQ, while transformer steel output was up 49% QoQ.
2Q10 guidance confirmed, cautious 3Q10 outlook. In its outlook statement, NLMK confirmed its positive profit guidance for 2Q10: revenues of approximately $2.2 bln (up 30% QoQ) and an EBITDA margin of 25-30%, implying EBITDA of $550-$660 mln (up 40-70% QoQ). NLMK expects flat steel production volumes in 3Q10 despite unstable steel demand, but foresees a decline of some 10-15% QoQ in average prices. It expects short- and medium term global prices to remain rather volatile. High production costs of non-integrated steel producers may result in production cuts, supporting steel prices.
Among lowest-cost producers globally. NLMK's quality asset base in Russia and product offering should allow it to retain its position as one of the most profitable steel producers worldwide in terms of EBITDA margin this year. With a current cash cost of slab at around $300/ton, NLMK remains the lowest-cost producer in Russia and one of the lowest globally. It plans to increase crude steel capacity in Russia by 5 mln tpa to 17 mln tpa by 2012, which should allow it to become the largest Russian steel producer in terms of domestic crude steel capacity. In our view, the market may not be fully discounting this ambitious 40% increase in steelmaking capacity. We reiterate our Buy recommendation on the stock.
Strong 2Q10 trading update
2Q10 steel production up 7% QoQ. Evraz (EVR -Buy) yesterday published strong 2Q10 operating results. Crude steel volumes rose by 7% QoQ to 4.3 mln tons driven by a sizeable increase in volumes in its Russian steel division. Crude steel production amounted to 3.1mln tons in Russia (up 8% QoQ) on the back of a 19% QoQ jump in railway output, suggesting a positive improvement in the production mix. In North America, crude steel volumes rose 3% QoQ to 574 kt, while in Ukraine, steel output fell 4% QoQ to 249 kt. Production in Europe was notably strong, with crude steel production up 73% QoQ.
Decline in coking coal output. In the mining segment, iron ore and pellet production increased by 4% QoQ. On the negative side, the coking coal segment showed a 35% drop in raw coking coal production, which may be attributed to additional preparation work during the period on coal mines at Yuzhkuzbassugol and the launch of new equipment. Importantly, reported average selling prices were exceptionally strong, reflecting 25-30% QoQ growth in Russia and Ukraine and 10-20% in Europe and North America for the period.
In line with guidance. The strong operating numbers support the positive 2Q10 EBITDA guidance of $725-$825 mln (up 70- 95% QoQ) provided earlier by management. The company did not provide any outlook statement regarding 2H10. Evraz trades at a 2010E EV/EBITDA of 6.8 and 2011E EV/EBITDA 4.2, offering 15% and 30% discounts to emerging market peers. Evraz remains high-beta Russian steel play, which should benefit the most from a possible recovery in steel prices in September-October this year. We reaffirm our Buy recommendation on the back of this update.
Audience share maintained at a reasonable level in 2Q10
Domashny's target audience share up 0.5 ppt QoQ to 3.5%. CTC Media (CTCM -Buy) yesterday released solid 2Q10 data on target audience shares, showing impressive improvement for the Domashny channel, but some decline for CTC. The figures demonstrate that the development of small channels is well on the track and should lead to an advertising sales' rise. The Domashny channel got a 3.5% audience share in the afemales 25-60' group in 2Q10, up 0.5 ppt QoQ and 0.6 YoY. The target audience share for DTV's action/investigative movies remained flat QoQ at 2.1%. CTC, an entertainment channel aimed at viewers aged 6- 54, lost 1 ppt QoQ and 1 ppt YoY of its target audience, getting 11.5% in 2Q10. We consider the weakness as temporary, since the channel - with in-house production of good-quality content and which monitors audience shares regularly -is likely to reverse the decline when the new TV seasonal comes on.
CIS exposure implies upside risk. CTC Media's CIS presence remains an additional factor for revenue growth (the CIS brings in only 2% of total sales). According to the 2Q10 data on the CIS, the target audience in Kazakhstan's Channel 31 grew 1.8 ppt QoQ and 0.5 ppt YoY to 12.2%. CIS advertising markets may rebound rapidly following the crisis, implying upside risk for CTC Media (which also has channels in Uzbekistan and Moldova).
Sound investment story with well-built business model. We did not expect a tangible reaction of the stock to the statistics release. The growth rate for small channels proves CTC Media's ability to realize a successful development strategy. While the company is expected to post a marginal rise in target audience shares (0.1 ppt YoY for CTC and Domashny in 2010), its sales will be driven primarily by recovery of the Russian advertising market (we project a 17% QoQ rise in ruble revenues in 2010). CTC Media is an unleveraged company with decent OIBDA margin over 40% and strong operating cashflow, allowing dividend distribution. We reiterate our Buy recommendation on the stock and target price of $20/share.
Neutral 1H10 trading update: negligable revenue growth, as expected
Still weak revenue growth. Yesterday, Seventh Continent (SCOH - Hold) released a neutral trading update for 1H10. Dollar- denominated revenue increased 15% YoY to $825 mln; however, this double-digit growth was entirely due to ruble appreciation, while ruble revenues grew just 4% YoY. However, sales growth slightly accelerated in June to 5% YoY in rubles, compared to 4% YoY growth in May. Having grown 25% YoY in dollar terms (13% in ruble terms), revenue from regional stores continued to significantly outperform those in the Moscow region.
Weak LfL sales and expansion. Since the beginning of 2010, Seventh Continent has closed three poor-performing stores, and just rolled-out one new store. The total number of stores now stands at 140. This factor also explains the sales growth stagnation in 1H10. Like-for-like ruble sales were up only 1.7% YoY: the retailer successfully managed like-for-like traffic, with 4.2% growth; however this came at the expense of a 2.4% decline in tickets. Due to an aggressive price policy, the average basket rebalanced towards lower cost value-added goods. The retailer reported a $260 mln gross debt, as of 30 June 2010, which is lower than what we estimated based on fairly outdated financial reports from the retailer (2008 IFRS).
Neutral for the stock performance. We view this trading update as neutral for Seventh Continent shares. Sales growth in 1H10 was depressed by the fact that Seventh Continent lost revenue from three mature stores, which could not be adequately substituted by just one newly opened store (immature). The revenue growth may accelerate in 2H10, especially if the retailer opens at least part of the recently announced plan to roll out 25 stores (mentioned in management guidance for 2010). The closure of poorly performing stores may be positive for margins. We reiterate our Hold recommendation on the name.
Marginally weak 1Q10 IFRS
Moderate YoY growth. Yesterday, Veropharm (VRPH - Not Rated) released marginally weak 1Q10 IFRS results. Revenue slightly increased 5% YoY in rubles, while dollar-denominated sales were up 20% YoY to $32 mln. Revenues fell 5% below the Interfax consensus, which we note was formed on the forecasts of just four analysts. Gross profit outperformed all the lines, thanks to a 5 ppt YoY increase in the OTC share of total sales, growing 19% YoY to $24 mln. Due to a 22% jump in SG&A costs, EBITDA only slightly increased by 4% YoY in ruble terms to $7 mln (RUB199 mln), but was nevertheless 33% short of the consensus. Net income marginally fell by 3% YoY to $4 mln, falling 41% below consensus.
Gross margin strengthening. The increase of high valueadded OTC drugs (prices are not legislatively controlled) in the product mix added 8.2 ppt YoY to the pharmacy producer's gross margin in 1Q10, brining it to 72.9%. At the same time, high SG&A growth led to a 0.3 ppt contraction of EBITDA margin to 20.6%. Net margin declined 1.2 ppt YoY to 12.6%. Net debt was up 9% to $33 mln compared to the end of 2009, while its structure has not materially changed, with short debt accounting for 94%. Accounts payable increased 66% QoQ, however we note that this is a typical seasonality. Receivables and inventories remained stable.
Results marginally weak. We believe the news is marginally negative for the stock, although we do not expect any significant reaction due to its extremely low liquidity. However, an unimpressive 1Q10 IFRS is not much of a surprise in light of the recently published weak 2009 results. We see that Veropharm is still reeling from a very weak 4Q09 and the introduction of a new pharma law, which regulates the pharmaceutical market.
1H10 RAS results: robust balance sheet expansion
Stable NPL ratio. Sberbank (SBER03 RX - Buy) yesterday released nonconsolidated 1H10 RAS results, with net income of RUB60.7 bln ($1.9 bln). Sberbank's balance sheet showed continued strong growth, with retail loans up 1.9% MoM - their strongest growth in more than 18 months - and corporate loans up 1.6% MoM for a second straight month. Retail deposits and customer accounts increased by 2.7% and 2.6% MoM, respectively. The NPL ratio (based on the CBR's methodology) was unchanged MoM at 5.7%, due mainly to lending growth.
2Q10 net income down 59% QoQ on cost of risk, expenses, and lower NIM. In 2Q10, net income declined 59% QoQ to RUB17.5 bln ($0.6 bln) from 1Q10's RUB43.5 bln ($1.5 bln). The bank charged RUB44.1 ($1.4 bln) to provisions in 2Q10 versus RUB8.1 bln ($0.3 bln) in 1Q10, when it transferred a number of assets to its subsidiary (in March) and recovered some provisions. As a result, LLPs increased to 12% in 2Q10 from 11.4% in 1Q10. Higher expenses (up 36% QoQ) also dampened the bottom line in 2Q10, as staff costs increased. In addition, NII remained flat despite robust lending growth in June, which may indicate some pressure on the NIM in 2Q10.
Much brighter 2H10E. We still believe that the bank's 2010 net income guidance of RUB100 bln is likely to be exceeded, and we expect the bank to improve its outlook after the 2Q10 IFRS results are published in August-September. The bank has capacity to intensify its lending activity going forward, and the NIM is set to stabilize in 2H10 when the rate on its subordinated CBR loan is set to be cut and deposits re-priced lower. We have a Buy recommendation on Sberbank and a target price of $3.7/share, offering upside of around 40%.
URALSIB Capital, 8, Efremova St, Moscow, Russia,119048,
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|Publication:||Russian Banks and Brokers Reports|
|Date:||Jul 16, 2010|
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