Uralsib - Russia Daily Equity Update - Sep 13, 2011.
Despite the sharp sell-off across the board on Monday, US indices managed to shrug off fears during the day and closed in positive territory. This morning we expect a marginal rebound on the Russian market at opening.
(To view the full report please click here:
Evidence of an economic slowdown has increased concerns of either sustained slow growth or another recession. We attempt to quantify the potential impact of both scenarios on the Russian market using a top-down analysis and bottom-up approach.
AFK SISTEMA (SSA LI - BUY)
AFK Sistema will release 2Q11 US GAAP results tomorrow. We expect a healthy improvement in sales driven by strong sales growth at MTS and Bashneft and supported by seasonal improvements in revenues from the holding's consumer-oriented operations.
CTC MEDIA (CTCM - UNDER REVIEW)
CTC Media announced that it had lowered its revenue growth outlook for 2011 from 20% to 15% in local currency terms; as our model, which implies 25% growth in ruble terms, now looks excessively optimistic, we have taken it Under Review.
VEROPHARM (VFRM RX - BUY)
Veropharm is to report 2Q11 IFRS results tomorrow. We expect profitability to deteriorate due to the weak top-line performance and higher SG&A cost growth. The results may trigger short-term weakness in the stock which could be used as buying opportunity.
GAZPROM (GAZP RX - BUY), NOVATEK (NVTK LI - HOLD)
The government is considering raising the average gas tariff 7.5% in 2012 via a 15% increase in July 2012. It should increase EBITDA by 1% for Gazprom and 3% for NOVATEK in 2012 compared with the conservative 6% tariff-growth scenario.
ACRON (AKRN RX - BUY), DOROGOBUZH (DGBZ RX - BUY)
Nitrogen fertilizer producers will benefit from the announced delay in raising natural gas prices from 1 January 2012 to 1 July 2012. Delay translates into lower average gas prices and higher expected EBITDA margins for the segment.
SITRONICS (SITR - HOLD)
Sitronics may sell its 38% stake in Intracom Telecom to Huawei, Kommersant reports today. The deal is strategically justified, and may be part of preparations for a merger of Sitronics with RTI Sistems; we reiterate our Hold recommendation.
ROSINTER (ROST RX - NOT RATED)
Rosinter released 2Q11 IFRS results which demonstrated strong margin deterioration YoY. The YoY decline in the company's profit and very weak margins may generate negative sentiment around the stock on slow revenue growth and continued loss of traffic.
GLOBAL PORTS (GLPR LI - NOT RATED)
The company released 1H11 IFRS, which reflected positive trends on the container cargo market. Although the company delivered a strong set of operational and financial data, which are supportive for the share price in the short-run, Global Ports is not considered a safe haven in the current market environment given the cyclical nature of its business model.
NEWS IN BRIEF
LUKOIL is going to invest around $25 bln in its downstream business within the next ten years, LUKOIL's CEO Vagit Alekperov announced yesterday. Also, he announced the initiation of construction of hydrocracking in the company's refinery in Burgos, Bulgaria. Source: Vedomosti
Maxim Barsky, acting CEO of TNK-BP, said yesterday that the company is going to increase the share of reserves in East Siberia to 25% of total over the next five years; the figure is currently 10%. Source: RBC Daily
Two steps back, one step forward
Some relief at opening today. Despite the sharp sell-off across the board on Monday, US indices managed to shrug off fears during the day and closed in positive territory with the Dow Jones and the S&P up 0.6% and 0.7%, respectively. European fears, especially regarding Greece, still loom over markets, but rumors that China may buy out Italian debt and invest into strategic companies shored up the US market by the end of the session. Today Italy will auction EUR7 bln of bonds and there are no big macro statistics today except for import/export prices in the US. Several European countries will report August CPI numbers today. Bank St Petersburg is to close the reporting season for Russian banks with 2Q11 IFRS results. This morning we expect a marginal rebound on the Russian market at opening, as most Asian indices are up and S&P future have added 0.3%. Oil is also trading up this morning.
Fork in the road: slow growth or recession
Two possible scenarios: slow growth versus recession. Evidence of an economic slowdown, exacerbated by European sovereign debt issues, has led investors to assess the potential impact of two possible scenarios that the global economy could follow in the medium term: sustained slow growth or another recession. We attempt to quantify the potential impact of both scenarios on the Russian market using a top-down analysis and bottom-up approach. (Please see our report published yesterday.)
Stocks will do well in a slow growth environment. We believe moderate or even slow economic growth will support equities that are attractive and estimate a potential 26% upside for the RTS index in the slow growth scenario. We have assessed the potential effect of an economic slowdown on the RTS index's year-end target levels using a bottom-up approach to individual stocks. A reduction in the growth rate to 75% of current assumptions would cause the target
RTS index level to fall 2,180, while a 50% reduction would pull the target down to 2,080. This would still imply 26% upside from 1,650.
Recession would be a game changer. We continue with our view that even a mild recession in the global economy would be a game changer for equities, both as an asset class and for Russian equities in particular. We believe the market could lose another 10-20% if there is a mild recession and note that stocks have already priced in a probability of 60-80% of this scenario. A deeper and prolonged downturn will cause a further fall in excess of 50%. We do not use either of these as our base scenario, but acknowledge the increasing risks of such a negative development.
Preferred positioning. For now we favor defensive, high quality names and high-dividend stocks with a focus on the strongest names (competitive positioning, high profitability and healthy balance sheet) with defensive features that are positioned to outperform in the medium term. High dividend paying stocks with low earnings volatility and strong cash generation are also preferred if economic conditions deteriorate. A counter bet on leveraged names in cyclical sectors would pay-off if growth takes off again.
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