Page 45 - Buy Russia - bne IntelliNews monthly magazine April 2017

bne April 2017 Cover story I 45
Alrosa: the diamond in the tundra
Russia’s diamond monopolist Alrosa is the new kid on the block for equity investors. Another state-owned enterprise (SOE) that defies the “government is bad at business” adage, equity investors started to pay closer attention to it after 11% of the company was successfully privatised in July last year.
Located in Mirny in Eastern Siberia, Alrosa is deep in the tundra on the site
of a former Gulag camp that had huge Kimberlite pipes – the rock where you find diamonds. The company reported strong January rough diamond sales
of $358mn, up 60% y/y, thanks to a quicker than expected recovery of Indian demand. And analysts expect this growth to continue as diamond dealers start
to restock following a very bad 2015.
The company is part of the govern- ment’s privatisation drive and, while
the government has delayed most of the privatisation on the docket, the track record of those SOEs that have been privatised has been excellent: the shares of Rosneft, Sberbank, the Moscow Exchange (MOEX), and Aeroflot have all had long runs of outperforming the mar- ket following the partial privatisation of their shares. The next interesting name that should come up in the first half of this year will be the partial privatisation of Sovcomflot, a state-owned global shipping powerhouse. And more Alrosa shares are also due to be sold this year.
Part of the growing appeal of SOE shares is a switch in mindset by the government on how to profit from these names. In
the 1990s, the Yeltsin government lived hand to mouth by levying special taxes on Gazprom whenever it ran out of money. Today the state has decided a better way to tap the billions these companies gener- ate is to force them to pay dividends: currently all SOEs are supposed to pay 25% of their profits out to sharehold-
ers – including the minorities – and the
Ministry of Finance is trying to force them to pay 50%. Many of the SOEs are resisting this push, but not Alrosa, which is expected to pay 50% of net profit in dividends for 2016. If it does they would total RUB9 per share, yielding a whop- ping 10.4% dividend yield. "Following the recent sell-off, we consider Alrosa as one of the most oversold stocks in the Russian metals and mining sector and reiterate our ‘overweight’ recommendation," Gazprombank said in a note in March.
MOEX
Finally, the last stock to highlight is the Moscow Exchange itself. 2017 should be a good year for Russia’s leading exchange (there are about half a dozen
smaller exchanges in the country) as Russian companies increasing come home in search of better liquidity. MOEX is transforming from a local exchange in an emerging market to a global player in its own right, even if the International Financial Centre programme launched several years ago is downplayed today.
The exchange was transformed following the merger of the RTS and MICEX in 2011 and hooked up to the global capital mar- kets after it joined Clearstream and Euro- clear. MOEX is unusual in that in addition to the fees it generates from the trade of stocks and bonds it also earns income from custody, settlement, derivatives and FX trading amongst other things.
“The stock is valued at a 2017F price-to- earnings ratio (p/e) of 10.2x, or at a 54% discount to global emerging market peers,” VTB Capital said in a note that marked the name up to a ‘buy’ in March. “Headwinds remain, but the business is solid.”
Russian stocks pay top dividend yields
Investing into Russian equities is all about cherry picking amongst the best corporate names at the moment. Many of them are paying out handsome dividends, consistently outperforming the rest of the market.
Many companies are using dividends simply as the preferred way to take cash out. Even the government has got into this game; rather than increas- ing taxes on its major state-owned enterprises (SOE) it has ordered its com- panies to pay out at least 25% of profits as dividends and it is hoping to raise that to 50% this year.
Company
2015 dividend yield
2016 dividend yield forecast
2017 dividend yield forecast
SurgutNG, pref.
21.4%
15.4%
4.8%
LSR Group, ord.
11.9%
11.5%
9.0%
MTS, ord.
10.7%
10.5%
10.5%
Megafon, GDR
9.2%
9.5%
8.3%
Rostelecom, pref.
6.4%
8.5%
10.6%
Nordgold, ord.
5.3%
6.7%
9.3%
Mostotrst, ord.
8.1%
7.9%
7.9%
M.Video, ord.
14.1%
7.7%
6.6%
HMS, GDR.
7.6%
7.7%
19.3%
Lukoil, ADR
6.6%
7.3%
6.6%
Source: VTB Capital
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