Uralsib - Russia Daily Equity Update - Oct 20, 2009.
Apple defies gravity
Earnings continue to surprise. Apple crumble will not be on the menu today after US company Apple reported earnings that exceeded consensus forecasts. The results came after the Dow closed up 1.0% and the S&P 500 added another 0.9%, so this will further boost the positive investment sentiment this morning. The VIX volatility index was below 20.0 yesterday afternoon in a sign that investors are in no mood to jump out of this bull run just yet. Russia will again be the high beta theme in global markets today after WTI crude closed within 50 cents of $80/bbl. Today, investors will be focused on the Svyazinvest board meeting in the hope of hearing some details about the timeline for privatization and proposed industry restructuring. Rostelecom closed up another 15.7%, at $40.25/ADR, in the US ADR trade, extending last week's 20% rally. X5 Retail Group will host an investor day in Moscow. In the US, the big corporate report of the day will come from Yahoo after the bell. Before this, the housing starts report will be published, with investors looking for the improving trend to have continued last month.
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Crude and Wall Street push Russia higher. Friday's tendency towards safety, or profit taking, was quickly dispelled early in yesterday's session. The dollar headed south and optimism headed north on hopes of even better earnings reports this week. The price of crude went higher with the weaker dollar and the stronger trend in global equity markets, and this pushed the ruble stronger. Against the dollar, the ruble added another 2 bps, to close at 29.313, while against the euro it closed at 43.755. The RTS index gained 1.8% to end at 1,433.4, while MICEX added 3.7% to end at 1,365.2. Gains were recorded in almost all market sectors, but especially in Gazprom (up 2.1%), the oils (LUKOIL rose 1.9%) and the banks. Sberbank added 4.7% to $2.335 on the RTS, while VTB closed 5.2% better on MICEX.
The best-performing stock was Rostelecom. It jumped 19.6% on MICEX ahead of today's Svyazinvest board meeting as well as because traders are looking for stocks that have underperformed in this year's rally. In the London GDR market, there was good demand for Russian names as part of the rally in the emerging market asset class. Russia was again the high beta theme, benefiting from the near $80/bbl oil price. Norilsk Nickel was one of the best movers, rising 4.7% after the release of its strong 2Q09 results to close at $14.03/GDR. The oil service stocks were also in demand as one of the main beneficiaries of higher oil. Integra rose 3.5% and Eurasia Drilling closed 5% better at $16.80/GDR. NOVATEK, initiated by our oil team with a buy recommendation yesterday, closed 4.4% better at $54.50/GDR. VTB reversed Friday's fall with a gain of 4.6% to end at $4.52/GDR. In the US ADR market, VimpelCom and MTS both gained, adding 5.2% and 3.7% to $20.81/ADR and $54.54/ADR, respectively. Mechel closed 4.4% better at $21.56/ADR, while Wimm-Bill-Dann was again the odd one out, closing down 2.1%.
Compact and efficient: growth story intact
Promises given, results delivered. The market likes NOVATEK (NVTK - Buy) for one simple reason: it promised to provide outstanding production growth and financial efficiency during the IPO back in 2006, and has kept this simple promise since. The company boasts strong production growth, a flexible gas marketing policy and solid financials, disregarding the financial crisis. The gas business itself has milder taxation than oil, and domestic market gas liberalization is imminent. We expect 2009-18E EBITDA and net income CAGRs of 21% and 23%, respectively, with an average ROACE of over 30%, which is higher than Russian oil majors' 25%.
Significant upside. We re-initiate coverage of NOVATEK with a Buy recommendation and a DCF-derived target price of $7.7/share ($77/ADR), implying 57% upside. Although NOVATEK is traded with a premium to Russian peers on multiples, we believe this premium is justified by growth and efficiency and could be sustained over the long term.
Oil & Gas Sector
Selective stock-picking - Gazprom shows strong potential
Fair prices revised on updated assumptions. We have revised our DCFmodels for Russian oil and gas companies, incorporating our new macro forecast as well as sector, company-specific and valuation assumptions. There are two core changes to our DCF models: 1) our equity-risk premium has been lowered from 9% to 7%, and 2) our ten-year DCF model is now based on a forecast period of 2010-19. We see growth opportunities in Gazprom (GSPBEX), Gazprom Neft (SIBN) and LUKOIL (LKOH):
- Valuation for Gazprom upgraded to Buy. We have upgraded our valuation for Gazprom, incorporating new macro, production and marketing forecasts as well as 1Q09 IFRS numbers, deriving a higher target price of $8.9/share (up from $6/share) and assigning a Buy recommendation. We like Gazprom, as the company's stocks underperformed oil names in 1H09, while gas production and exports in July-September returned to 2008 levels.
- Acquisitions support Gazprom Neft's value. Gazprom Neft remains among our top oil picks, due to its strong operating and financial efficiency and anticipated low-cost upstream expansion through M&As. We reiterate our Buy recommendation for Gazprom Neft, increasing the target price to $6.1/share from $4.1/share.
LUKOIL's gap to Rosneft should narrow. We increased our target prices both for Rosneft and LUKOIL to $7.7/share and $72/share, respectively, keeping our Hold recommendation on LUKOIL and raising our recommendation for Rosneft from Sell to Hold. Even though we have a Hold recommendation on LUKOIL, we believe LUKOIL's discount to Rosneft should narrow, and recommend playing on this trading idea in the short term. Both companies are continuing with their upstream expansion, with Rosneft having stared the Vankor field in August and LUKOIL continuing with construction of an offshore platform on the Caspian Sea. Both companies were successful in cutting their operating costs during 1H09 due to the crisis.
Rospan may double TNK-BP's gas production
Rospan production may reach 15 bcm by 2015. Rospan International, which is 100%-owned by TNK-BP (TNBP - Hold), may boost its production to about 15 bcm by 2015 from the current 2.3 bcm, but only if Gazprom provides access to the gas trunk-pipeline system, Rospan CEO Dmitry Orlov said yesterday. The company has received the technical requirements for access to the pipeline from Gazprom, and recently began designing a pipeline from its fields to the Unified Gas Supply System (UGSS). TNK-BP invested $128 mln into Rospan in 2007-08; but the total required to accelerate production to the target level of 15 bcm is an estimated $5 bln.
Production limited artificially. Rospan holds licenses to develop two gas and condensate fields, Vostochno-Urengoiskoye and Novo-Urengoiskoye, in the Yamal Nenets autonomous district with total estimated C1+C2 gas reserves of 891 bcm of gas and 133 mt of gas condensate under Russian classification. Although the company has significant production growth potential, its production is artificially limited due to issues with access to the trunk pipeline. The company's gas output was 1.5 bcm in 2007 and 2.5 bcm in 2008, which is a respective 17.6% and 24.7% of TNK-BP's total gas output. Gazprom subsidiary Mezhregiongaz and Rospan agreed in 2008 to establish a JV to market Rospan's gas.
Potentially positive for TNK-BP valuation. The fact that Rospan could double TNK-BP's gas production from 10.2 bcm in 2008 to about 23 bcm by 2015 is well known by the market. However, the timing and capex of Rospan development remain uncertain. Given the latest news, we estimate that development of Rospan could add 16.3% to TNK-BP's target price, although until approved, we have not incorporated this in our base-case DCF-model, as the key issues - access to the UGSS and gas-market distribution - remain unsolved. We reiterate our Hold recommendation on TNK-BP.
Benefiting from weaker ruble: 1H09 IFRS review
1H09 EBITDA 24% above consensus. Norilsk Nickel (GMKN - Under Review) yesterday released strong 1H09 financials, which came substantially above the market consensus on EBITDA and net income. While the revenues of $4.1 bln (down 51% YoY) were generally in line with projections, EBITDA of $1.4 bln was 24% above the market consensus of $1.1 bln (we had projected $1.16 bln) due better-than-expected cost-cutting for the period. On the bottom line, despite the $304 mln forex loss, the company posted net income of $419 mln (down 84% YoY), which was also 20% above consensus estimates.
Driven by metals prices, placed Under Review. In our view, despite the positive earnings surprise, the 1H09 financials should largely be a non-event for the market, which is more focused on the current nickel-price environment. We note that nickel prices have doubled from their 1Q09 lows to around $19,000/ton, making our average 2009 nickel price assumption of $12.500/ton too conservative (the YtD average nickel price is above $14,000/ton). In order to incorporate the higher 2H09 nickel, copper, and PGM prices, as well as the 1H09 financial results and our new macro forecast, we are placing the stock Under Review. We still view Norilsk as a pure commodity play, with concentrated country, commodity, and operating risks, no growth strategy, and uncertainty surrounding its shareholder structure. Consequently, it should trade at a substantial discount to the world's leading mining companies. Furthermore, as a low-cost producer, the stock is a low-beta play on commodity prices.
Potential resurrection of KazakhGold's Kyrgyz project
The company might apply for Jerooy license. According to Interfax, Polyus Gold (PLZL - Buy) is among the companies interested in developing the Jerooy gold deposit in Kyrgyzstan. The deposit contains reserves of 2.1 mln oz of gold (75 tons) at a grade of 6.3 g/t. Currently, the license is held by CJSC Jerooyaltyn, owned by a group of private investors (60%) and the Kyrgyz government (40%). On 1 October, the license was to be annulled due to the previous owners' failure to meet the terms of the license. Rather than lose the license, they have asked the Kyrgyzstan Development Fund to sell it to a new investor.
Potential output of 180 k oz. In May 2007, KazakhGold, a Polyus Gold subsidiary from 2009, purchased the 75%-complete carbon-in-pulp plant at the Jerooy deposit with an annual processing capacity of 1 mln tons of ore. The plant has potential to produce 180 k oz of gold annually. KazakhGold's bought the plant in order to place themselves in a good position to win access to the gold field from the government, but to date it appears as if this bid has failed. The license to the field has been re-issued several times, due to a failure of the license holder to meet the terms of the license. Now, with the possibility of the license being recalled again, the private owners have decided to sell it.
Outcome is uncertain, but it may be a pleasant surprise. At present it is uncertain whether Polyus will obtain the license. However we understand that the company is in negotiations with both the Kyrgyz government and the private investors. Reportedly, the Development Fund views Centerra Gold, which is already developing Kyrgyzstan's Kumtor gold field, as a strong candidate. We see no other real candidates, besides Polyus and Centerra. All in all, Polyus Gold should be in a better position to negotiate than KazakhGold did in the past, and if the company gets the license it would start producing shortly afterwards, adding around 14% to 2009 expected output. We reiterate our Buy recommendation on Polyus.
1H09 IFRS preview: now a year of losses
Fourth consecutive quarters of losses. Tomorrow, VTB (VTBR LI - Sell) is set to release 1H09 IFRS results, which will be followed by a conference call with analysts. The results should be a non-event as, after three consecutive loss-making quarters, VTB is again expected to post losses. The bank's 2Q09 IFRS results will be the last of the 2Q09 reports for traded Russian banks. We believe the anticipated 2Q09 loss will be a result of the same issues evident in the previous quarters; namely high provision costs and pressure on margins, which will result in a low net interest margin. After the strong rally in the name recently that was driven by the high discount to Sberbank (based on a 2010E P/BV of around 50%) and the successful share placement in September, we believe that there is a lack of drivers for further re-rating of the stock by the market at the moment. We expect the net loss to amount to RUB15.7 bln ($0.5 bln) and this could trigger some weakness in VTB shares.
Slightly better than in 1Q09. We expect NPLs to reach around 7% in 2Q09, up from 4.3% in 1Q09 and the coverage ratio to remain above 100%. The results will likely replicate the 1Q09 results, although we may see trading gains on securities and forex. We expect operating costs to increase slightly by 9% QoQ and the cost/pre-provision operating income ratio to improve to 40%. In 3Q09, the bank raised TIER-1 capital to RUB180 bln ($5.7 bln) and, while capital adequacy is set to worsen in 2Q09, in 3Q09 we expect substantial improvement. The most important aspects of the results will be costs, overdue loans and management's outlook for 2009 and 2010.
Further re-rating of the stock is limited. The bank's discount to Sberbank, based on a 2010E P/BV, has recently declined to 25% from 50% and the stock is trading at 2010E P/BV of 1.5 or at a 20-30% discount to emerging market peers, which is justified in our view. The market is driven primarily by the liquidity momentum at the moment and VTB's shares are trading at a 2009E P/BV of 1.5, which is more than fairly valued, in our view. As a result of this we maintain our Sell recommendation on the stock.
URALSIB Capital, 8, Efremova St, Moscow, Russia,119048,
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|Publication:||Russian Banks and Brokers Reports|
|Date:||Oct 20, 2009|
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