Page 44 - Buy Russia - bne IntelliNews monthly magazine April 2017

44 I Cover story bne April 2017
Tinkoff Credit Systems:
savers’ savings
The rest of the banking sector has had a terrible time in the last few years, barely breaking even on aggregate. However, Tinkoff Credit Systems (TCS), set up by serial entrepreneur Oleg Tinkov, is an exception. Russia’s first purely online bank, it has been flourishing thanks to its low-cost base, which allows it to offer attractive deposit rates – something the inflation-sensitive Russian consumer pays close attention to.
However, TCS’ share price also highlights another rule of thumb for investing into Russian stocks: don't buy the IPO. TCS listed in London with much fanfare on October 22, 2013, priced at $17.50, the top of the offer range, to raise $1bn on a valuation of $3.2bn. But the share price immediately crashed as the 2015 silent crisis got underway, falling to a nadir of $1.60 in September 2015. Since then the shares have recovered strongly and were trading at $10.75 at the end of March, but they remain underwater compared to the IPO. It's a typical story as most Russian stocks are overpriced at the time of their listing and several, like the “people’s IPO” of state-owned VTB Group, never regain their offer price.
Still, if the investor gets the timing right then these IPO disappointments can turn into stellar investments. TCS has turned into an excellent proxy for Russia’s bank- ing sector. The bank earned RUB3.7bn ($65mn) in the fourth quarter of 2016, well above consensus (RUB2.7bn), four- times more than in the same period a year earlier, as well as more than a third (37%) more than the quarter before.
“Annualised return on equity was an outstanding 51.4% (20.5% for 3Q16). Net interest income increased 39%
y/y and 8% q/q to RUB9.5bn, while
net interest margin (NIM) improved to 26.5% (vs 25.9% for 3Q16),” Gazprom- bank gushed in a research note.
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And like so many of Russia’s best stock picks, TCS is happy to share its growing profits with its shareholders: in March the bank introduced a new dividend policy with a payout ratio of 50% of the previous quarter's net income. The 2017 dividends should be a minimum of RUB7bn, which implies at least a 7% dividend yield, according to analysts.
Top PIK
Real estate is one of the few sectors
that are a theme amongst analysts and investors, partly due to the steadily rising volumes of mortgages. However, the pundits agree that PIK Group is cur- rently the hot stock in the sector, as well as being another name that recently left the LSE along with pharmaceutical firm Pharmstandard, Russian gold miner Polyus Gold, potash producer Uralkali and drilling giant Eurasia Drilling Com- pany, which have all maintained their Moscow listing.
PIK is Russia’s biggest housebuilder and it had a great year in 2016. It emerged
as the clear leader after reporting the strongest figures in the sector and after its acquisition of smaller rival Morton lifted the company clear of the competi- tion. Pre-sales have doubled to 1.7mn- 1.9mn sqm in 2017 from 950,000sqm
in 2015 and the stock has been a top performer in 2016, rising from $2.9 at the start of 2016 to $4.72 at the end of the year, easily outperforming the index.
Real estate has piqued investors’ interest after the Moscow residential market grew by a fifth (21%) y/y
in 2016, returning to the volumes
last seen in 2013. In the first three months of this year, the other big traded names in the sector, LSR and Etalon, made gains of 32% and 41% respectively, while the overall RTS and MICEX indices both are in the red YTD, down 5% and 10% respectively.
LUKoil: sexy oil stock
Raw material companies are usually included in a portfolio simply because the companies are so big and together make up about two-thirds of the Russian market capitalisation. In the last year, many of the big oil names have seen their stock rise as oil prices recovered following their crash in November 2014.
State-owned oil major Rosneft’s share price almost doubled from $3.47 on December 30, 2015 to end the year at $6.5 on December 28, 2016. And its sis- ter Gazprom also saw its share rise from $3.69 to $5.05 over the same period. While Rosneft’s returns beat the index, Gazprom underperformed by a third, according to Bloomberg data.
However, the sexy oil stock at the moment is privately-owned Lukoil, which has seen its share price outperform both the index and its peers in the last year. The stock has risen from $32.2 in January 2016 to end the year at $56.4 as of the start of this year. As of the end of March the stock is up just under 50% y/y, about 20ppt ahead of the RTS index.
Russia’s second-largest oil producer returned to profit in the fourth quarter after crude prices rallied, reporting
net income of RUB46.6bn ($786mn), compared with a loss of RUB65bn a year earlier. That beat the RUB45bn aver- age estimate of seven analysts surveyed by Bloomberg. Revenue held steady at RUB1.4 trillion ($24.6bn)
Free cash flow is increasing and Lukoil is upgrading, including a refinery-mod- ernisation project that will be “mirrored in dividends increasing every year”, according to Alexander Kornilov, an oil and gas analyst at Aton. Kornilov has flagged Lukoil as his top pick in the Russian oil and gas sector, thanks to good management, improving profits and a promise of generous dividend payout this year.