Uralsib - Russia Daily Equity Update - Nov 12, 2009.
Carry trade extends Russia gains
Ruble squeezed higher. The ruble remained more-or-less flat against the dollar yesterday, as investors increasingly play the carry trade between low yielding dollars and higher yielding assets including the ruble. The Central Bank is caught between a rock and a hard place with this issue, because while the government wants to attract higher volumes of foreign investment into long-term projects, it also wants to avoid the sort of speculative flows that pushed the ruble towards RUB23/$ in early 2008. Yesterday the ruble closed at 28.676 against the dollar and 43.08 against the euro. The positive ruble move plus continuing strength in international markets and commodities also helped the equity markets to mostly hold onto the gains made on Monday and Tuesday. Both of the main Moscow indices closed down, but only by 0.2% for the RTS (to 1,434.5) and 0.5% for MICEX (to 1,316.2). The mid-cap RTS 2 Index pushed 1.2% higher with gains in regional telecoms' shares. MSCI has closed its halfyear index's revision of the MSCI Russia index composition and included Inter- RAO (IRAO) and Sberbank's pref shares (Sberp) in the index. Rostelecom shares have been removed from the index, and Transneft's pref shares were included in the EM Small Caps index.
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Regional telecoms race ahead. The regional telecoms were the best investment theme yesterday after a newspaper report said that Prime Minister Putin supports the plan to merge all seven regional telecoms into Rostelecom. Volga Telecom shares led the way up with a gain of 10.2%, followed by Siberia Telecom, with a 7.8% gain, and Uralsvyazinform, rising 7.4%. Those gains were partly balanced with sector losses among the TGKs. TGK-4 closed 3.0% down, followed by TGK-9 and TGK-1, losing 2.9* and 2.8%, respectively. Trade in the blue chips was relatively quiet as investors were happy to hold onto recent gains, while waiting to see where international markets will go from here. VTB was one of the more active names, closing down 2.9%. Sberbank added 0.4% to end at $2.46/share on the RTS. MRSK Holdings gained 4.5% on speculation that it may be added to the MSCI Russia Index. In the US ADR market, Mechel fell 4.2%, to $20.32/ADR, MTS lost 0.5%, to $49.98/ADR, and Vimpelcom gained 0.1% to $20.61/ADR.
State of the nation: greater realism
Expect to hear about government priorities. President Medvedev will make the annual address to representatives of the joint houses of parliament (aka, the State of the Nation Address) today at midday Moscow time. Among the issues the president is expected to discuss are the economy and the government's plans to help industry and people recover from the recession. The president is likely to focus on pragmatic programs that will lead to greater diversification in the economy and reduce dependency on hydrocarbon revenues. In his article aForward, Russia!a, published in September, the president said that the habitual system of recycling the oil rent has exhausted the country's growth potential and only a movement towards an economy of innovation will extricate Russia from its deepening recession. Yesterday, the President's economic advisor, Arkady Dvorkovich, said "specific plans will be made public in the state-of-the nation address."
Shift in stimulus spending. In effect, therefore, we expect today's speech to shift the government's stimulus support from bailouts and rescuing banks and big companies in the so-called strategic industries, to investment spending in infrastructure and programs that can help expand the country's industrial base and modernize the economy. The president is also expected to reinforce the message that big state companies will have to prove their viability or, of those that cannot or will not change, many will be sold or closed. The president has recently said that the state's direct involvement in the economy will have to be reduced from 50%, at present, to 40% within five years and 30% eventually.
Need to send a positive message. President Medvedev is also expected to reiterate the government's plans to push the reform agenda more aggressively as well as initiatives to improve the country's investment credentials with foreign investors, both portfolio and strategic. Depending on where the oil price trades during the next three years, Russia may need to raise billions of dollars in new funding from international investors and it certainly wants to bring in the expertise of strategic investors to help the country's industrial base become more efficient.
Improved free-float; strongest growth
Positive outlook confirmed. We have updated our DCF-model of TNK-BP Holding (TNBP - Buy) to incorporate operational data for 9M09, as well as the 1H09 financials and 3Q09 financials of its parent company TNK-BP International. We included the change in risk free rate, from 9% to 7%, and based our DCF valuation on a 2010-19 forecasting period. We have also incorporated our new macro forecast, for details see our desknote aRussia Still on Track to Recoverya published on 10 November 2009. During 9M09, TNK-BP Holding posted the strongest upstream operating results of its Russian peers, recording average daily production growth of 3.5% YoY. The company also has the most efficient refining and marketing among its peers.
TNK-BP Holding's 1H09 GAAP financials reflected the effective cost-cutting program, which boosted the EBITDA margin by 13 ppt HoH to 27% (which was stronger than LUKOIL's and Gazprom Neft's) and the net margin by 10 ppt HoH to 18% (placing it in first place alongside Rosneft). We expect the company to post a 2009E ROACE of 38%, which would be the strongest in the sector. TNK-BP Holding and Slavneft, which is 49.9% controlled by TNK-BP International have the highest number of large greenfields, and we expect this will support overall production growth, particularly in Eastern Siberia. In addition, the Verkhnechonskoye field in Eastern Siberia now qualifies for potential zero export duties, while the Suzun and Tagul fields are eligible for export duty exemptions in the future.
Buy on solid performance. We have upgraded our target prices for TNK-BP Holding to $2.2/common share and $1.7/preferred share, from $1.2/common share and $0.9/preferred share, as a result of the strong financial and operational performance and our reduced WACC of 13.1%, from 15.0% previously. The company's improved free-float enabled us to assign a Buy recommendation (from a Hold previously) for common shares, although we retain our Hold recommendation for preferred shares.
Moving downstream - higher commodity prices boost value
Hold on commons and prefs. We have revised our DCF model for Tatneft (TATN - Hold), incorporating new macroeconomic and capex forecasts and the company's 2Q09 US GAAP results. There are two primary changes to our DCF model: (1) our equity-risk premium has been lowered from 9% to 7%; and (2) our 10-year DCF model is now based on a forecast period of 2010-19. We have increased Tatneft's target prices to $4.1/common share and $3.1/preferred share from $3.9/common share and $2.9/preferred share, implying 14% downside for common shares and 7% upside for preferred shares. We reiterate our Hold recommendation for common shares and downgrade our recommendation for preferred shares from Speculative Buy to Hold. (Please see our desknote published yesterday.)
Macro outlook positive; oil price outlook conservative. Although we have increased our Brent forecast from $58.1/bbl to $62.6/bbl for 2009, $61.4/bbl to $62.5/bbl for 2010, $63.9/bbl to $68.5/bbl for 2011 and $69.4/bbl to $70/bbl for 2012, our long term Brent forecast remains $70/bbl. For more details on our macro forecast please see our report aRussia Still on Track to Recoverya, published on 10 November 2009.
3Q09 IFRS preview: redirected gas sales to boost margins
3Q09 margins to improve despite lower revenues. Tomorrow, NOVATEK (NVTK - Buy) will release 3Q09 IFRS financials. While 3Q09 revenues will likely be lower, we expect EBITDA and net income to be similar to 2Q09: EBITDA of RUB9.4 bln ($300 mln) and net income of RUB7.2 bln ($230 mln). At the same time, EBITDA margins and net margins should improve. NOVATEK's 3Q09 results will indicate the swift recovery in domestic gas demand and, more importantly, the company continues to sell gas with a premium to the regulated domestic gas price. This confirms our positive outlook on the company. We reiterate our Buy recommendation, with a target price of $7.7/share, implying 62% upside. We have a positive outlook on NOVATEK's business and expect much stronger results in 4Q09, which will be attributable to the four factors stated below:
- Growth in gas demand during heating season. Historically, gas consumption increases in Russia during the heating season by an average of 40-60% compared to the rest of the year.
- Higher 4Q09 gas prices. Regulated domestic gas prices are expected to grow 6.2% QoQ in 4Q09.
- Sale of inventories to support revenue growth. In 3Q09 NOVATEK increased gas inventories by about 300 mmcm (3.8% of 3Q09 gas production) to 503 mmcm as well as gas condensate inventories by 30,000 tons (3.7% of liquids production) to 202,000 tons. The company plans to sell some of these inventories during the heating season (4Q09-1Q10).
NOVATEK's gas production can be accelerated. The utilization rate for the company's gas production is currently at about 86%, which allows for a significant increase in production if demand increases.
Bashneft to drop tolling schemes from December
BashTEK integration on track. AFK Sistema (SSA LI - Buy) subsidiary Bashneft will stop using oil tolling schemes from December, CEO Victor Khoroshavtsev said yesterday. Bashneft previously sold 50% of its oil on the domestic market and exported the remaining 50%; the refineries operated using a tolling schemes. However, as Sistema gained control over BashTEK, it announced that BashTEK's upstream and downstream assets are to be integrated into a single value chain, implying the cancellation of tolling schemes. This implies that Sistema will control oil-product sales, maximizing margins from the downstream segment. Full integration will maximize Sistema's value; we have a Buy recommendation on the stock with a target price of $25/GDR. We expect the main beneficiary of integration to be AFK Sistema, and the Bashkirian assets to operate as cost centers.
Refining cover should increase. BashTEK needs to strengthen its upstream to replace oil purchases from other oil producers with its own oil supplies, thereby increasing refining coverage, which currently stands at 37%, the lowest among its integrated Russian peers. Meanwhile, at a meeting with investors, Sistema indicated that the gap between upstream and downstream production is to be covered by external oil supplies in the short term. Bashneft recently signed one-year oil supply contracts with LUKOIL, TNK-BP, and Shell to cover the supply gap, while additional oil volumes will be supplied by Surgutneftegas. We view BashTEK's integration strategy positively, though we do not expect it to be completed soon.
Acquisitions should not be ruled out. Sistema is searching for upstream assets, and Russneft is in the company's sights, Kommersant reported on Monday, citing an undisclosed government source. According to the source, the companies have not yet conducted negotiations, as the price of a potential Russneft acquisition, as well as the company's high debt burden, have not suited Sistema.
Inter RAO, Kuzbassenergo, TGK-11
Inter RAO moving forward in gaining control over TGK-11
Control to be gained via asset swap. Inter RAO (IRAO - Not Rated) has completed its purchase of 18.9% of Kuzbasenergo (KZBE - Buy) from FGC (FEES - Hold) to swap it with SUEK for a 24.98% stake in TGK-11 (TGKK - Not Rated), Vedomosti reported today. This decision to sell the Kuzbassenergo stake was approved by FGC's BoD at the beginning of October, and, according to Vedomosti, the price was set as the average MICEX stock price from the moment of the decision to sell until the purchase, which is $0.0064/share ($88 mln for the stake), close to the current market price. The valuation for the stakes swap is not disclosed, but at current market price the 24.98% stake in TGK-11 worth $71 mln. We see this news positive for Inter RAO, which is purchasing generation assets at a significant discount to their international peers and is continuing its expansion on the Russian electricity market.
Inter RAO may accumulate controlling stake in TGK-11. Inter RAO plans to gain control over the TGK-11 stakes that are controlled by Rosneft subsidiary Neft-Aktiv (7%) and a TGK-11 Holding (16.2%), which is controlled by exminority RAO UES shareholders. Inter RAO may buy a 27.45% stake in TGK-11 which belongs to FGC, if Group E-4 does not exercise its option to purchase this stake. All of these transfers of ownership will give Inter RAO control over TGK-11.
Trading suspended. Trading of Inter RAO shares has been suspended until the beginning of December, as the company is currently in the process of registering its share issue as a result of changing the face value of the shares.
Controlling shareholder purchases shares on the market. Yesterday, Profmedia announced the purchase of shares in Rambler Media (RMG - Not Rated) on the market through a reverse accelerated book building. The results of the buyout should be announced today. Before the buyout Profmedia controlled 54% of Rambler Media and it has announced it may consider delisting the company from the LSE after the buyout is complete. However, according to the rules of the LSE, for this to happen, 75% of voting shareholders must consent to the delisting.
Losing market share. Rambler Media Group has lost 91% of its market value since its historic high in April 2007. At current levels, the valuation does not look too expensive, being traded at a 2009E EV/EBITDA of about 10 and having a strong balance sheet with a $25 mln net cash position. However, the fundamental prospects of the group are unclear, as it continues to lose its share of internet search traffic, which dropped from 19% in 2005 to just 6.6% in October 2009, implying that Rambler has moved from second place to fourth.
Investment case questionable. In our view, the risk of delisting Rambler is material, and should it take place, the risk of a value dilution for minorities is high. Rambler is effectively the only way to get equity exposure to growth in the Russian online advertising market through listed stock. Despite this, the investment case for the stock is questionable as the company's sales are growing slower than the overall Russian internet advertising market. We do not have a recommendation for this stock.
Dollar index trembling near support
Fair to expect market gains. The Fed's recent decision to leave interest rates close to zero put the dollar under pressure as investors' interest switched to higher-yielding assets. The dollar index, yesterday hit a new local minimum of 74.77. It bounced back above the 75 support level shortly after, and consolidated there. Since there are currently no major factors supporting the dollar, this particular support level could be breached fairly easily.
Should this happen, the dollar index could drop to the 73.5-74 range, leading to a chain reaction in all dollar-driven assets, and it would then be fair to expect oil prices to reach $84/bbl and gold to exceed its recent maximum and hit $1,150/oz. In our recently published technical analysis report, Play Against The dollar, we derived a link between the dollar index and Russia's RTS Index.
Our model shows that the RTS Index could rise almost 12% to 1,600 if the dollar index declines to 74. The RTS Index's key resistance level is 1,500, and most RTS stocks are close to their recent highs. Stock prices are currently consolidating near their local highs and seem uncertain what to do now; investors fear pushing stocks higher without supporting factors, but any selloff is stifled by buyers' expectations of further growth. Thus, we recommend that investors watch the developing dollar trend closely, and, in the event of a confident break through the support level, use the opportunity to speculate on a 1,600 target for the RTS Index.
URALSIB Capital, 8, Efremova St, Moscow, Russia,119048,
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|Publication:||Russian Banks and Brokers Reports|
|Date:||Nov 12, 2009|
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