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Russian Stocks: Potential Windfall or Disaster

Russian stocks are currently trading cheaper than half of their book net asset value...

Published: May 23, 2014 (Issue # 1812)



  • Gazprom claimed to have become the worlds most profitable company after releasing its 2013 IFRS financial statements.
    Photo: Sergei Porter / Fotoimedia

Foreign participants of the St. Petersburg International Economic Forum should give the Russian stock market a closer look. According to analysts, Russian companies are now massively undervalued, presenting a huge opportunity to investors brave enough to grab it.

Russian stocks are currently trading cheaper than half of their book net asset value, levels not seen even in troubled Egypt, said Martin Graham, chairman of London-based Oracle Capital Group and former head of the London Stock Exchanges AIM international market.

There seem to be more reasons than ever to avoid Russian stocks Russias confrontation with the West over Ukraine risks spilling over into damaging sector-wide economic sanctions; Russian growth has stalled to near zero; and the old bugbears of corruption, arbitrary courts and poor corporate governance have gone nowhere. But given the incredibly low price of Russian stocks, logic may in fact err on the side on investing.

Take state-controlled gas firm Gazprom, Russias biggest company. Releasing its IFRS financial statements for 2013 last month, Gazprom said it had surpassed Chinas Petrochina and the U.S. ExxonMobil and Apple to become the most profitable company in the world by EBITDA, earning a little over 2 trillion rubles ($58 billion) last year.

But despite this, Gazprom stock is trading at a price-earnings ratio of less than three. On May 21, the company had a market capitalization of $99.6 billion.

Russian companies are chronically undervalued, according to Graham: In terms of earnings Russian stocks are traded up to four times cheaper than other emerging markets, while providing the shareholders with four percent dividend yield, among the highest globally, he said.

The government has been trying to reverse the negative perceptions giving investors cold feet for years, with the International Economic Forum in St. Petersburg being one of the prime examples of the effort. But while the spat over Ukraine has stoked anxiety, the overall trend was set long time ago.

Geopolitical risk perceptions driven by the Ukraine crisis have contributed to low valuations. But even before the Ukraine crisis, Russian equities declined because of slowing economic growth and corporate governance risks, in particular in state-controlled companies, said Dmitry Alimov, founder and managing partner of Frontier Ventures, a venture fund investing in Internet companies.

One of the effects of this unwillingness to buy Russian shares is to make the government more reluctant to privatize its assets. For instance, Russian flagship airline Aeroflot has repeatedly delayed its privatization, citing low valuation and market volatility. In December, Aeroflots CEO Vitaly Savelyev told Bloomberg that the companys shares are about 40 percent undervalued.

Even Russias Internet and technology sectors, whose companies have traded better than other firms, currently trade at substantial discounts to pre-crisis levels, according to Alimov. Shares in Yandex, Russias leading internet search engine, plunged in early March, when the State Duma gave President Vladimir Putin permission to use military force in Ukraine. They then plummeted again in late April, when Putin hinted that Yandex had been subject to unfriendly influence by foreign powers, though the company has recovered some of the looses since.

The relentless downward trend cannot continue for ever. At some point, valuations will fall far enough to make investors reassess the market.

Russia was abnormally cheap even before the Ukrainian events, we see it as a sign of an oversold market. If Russian stocks discount to emerging market peers squeezes at least by half, this could lead to over 50 percent growth from current levels, said Ghaham.

The key unknown in this picture, however, is the timing, he added.





 


ALL ABOUT TOWN

Thursday, Oct. 2


The celebration of the bicentennial of the birth of Mikhail Lermontov continues with todays free exhibition in the citys Lermontov Library at 19 Liteiny Prospekt. Titled Under the Rustling Wings, the temporary exhibition will feature the costumes and scenery used in the 1917 production of Lermontovs play The Masquerade, which he wrote in 1835 when he was only 21 years old.



Friday, Oct. 3


Learn more about how to manage and evaluate employee performance during SPIBAs Human Resources Committee meeting this morning on Employee Assessment: Global and Local Trends. Starting at 9:30 a.m., the discussion will touch on such topics as the partnership between HR and business, reliable assessment strategies and more, with Tatiana Andrianova, the head of the SHL Russia and CIS branch in St. Petersburg, as the featured guest. Confirm your participation by Oct. 2 by emailing office@spiba.ru or calling 325 9091.


AmChams Procurement Committee Meeting is at 9 a.m. this morning in their office in the New St. Isaac Office Center on Ulitsa Yakubovicha.



Saturday, Oct. 4


Wine and cheese lovers will get their chance to revel during Scandinavia Country Club and Spas Wine Market Weekend. Going on today and tomorrow, wining diners can listen to live music, take part in culinary classes and, of course, sample a variety of fine wines from around the world. The cost of admission is 400 rubles ($10.30) for adults and 200 rubles ($5.15) for children.



Sunday, Oct. 5


Look for the latest fall fashions at the Autumn Market today in Freedom Anticafe at 7 Kazanskaya Ulitsa. The minimarket plans to offer clothes more flattering than the puffy jackets that are a staple of the citys cold-weather fashion, while offering the same amount of protection from the biting winds blowing off of the Baltic.



Monday, Oct. 6


SKA St. Petersburg, the citys KHL affiliate, welcomes Slovakian club HC Slovan in a match-up tonight at the Ice Palace near the Prospekt Bolshevikov metro station. The puck drops at 7:30 p.m. and tickets can be purchased on the clubs website or in person at either the arenas box office or the clubs merchandise store on Nevsky Prospekt.



Tuesday, Oct. 7


Learn more about Russias energy industry at the St. Petersburg Energy Forum that begins today and runs through Oct. 10. Attracting industry experts and political and business representatives, the forum plans to welcome more than 350 plus companies and their representatives to discuss the future of Russias largest economic sector.



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