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March 1, 2019 www.intellinews.com I Page 3
forming, up 14% YTD according to BCS, followed by the financial sector up 12% YTD.
“The cautious view on future oil prices is the key reason for the downgrade. Lukoil and Tatneft prefs are the most popular names in Russian O&G. Gazprom is becoming interesting thanks to resilience, low multiples. Domestic players are now the top picks in Russia. Rosneft is the key outcast due to write-offs,” Kirill Tachennikov, director and senior analyst at BCS Global Markets, said in a note.
Despite the switch out of oil, Russia remains port- folio favourite from the leading emerging markets (EMs), partly because of the high dividend yields, partly because of the low valuations and partly be- cause investors believe that the risks from poten- tial new US sanctions have already been priced in.
“Our institutional clients still prefer the Russian market to that of other EM countries. Most of them said they are overweight in Russian stocks v other EM companies’ stocks. They consider risks to be priced in. We believe that low valuations combined with high dividend yields will keep the Russian stock market resilient against possible new US sanctions and other problems typical of emerging markets,” Tachennikov added.
Investors are still holding names like the privately owned Lukoil that has seen its share price almost double last year; privately owned Surgutneftegaz prefs, thanks to its $40bn cash pile, interest on which account for about three quarters of its dividend payments; and, independently owned gas producer Novatek. The state-owned bluechips have been treading water, as bne IntelliNews recently reported in “Sberbank retakes Russia’s equity King of the Castle title.”
Sectors connected to the consumer are com-
ing back into focus with the traditional favourites catching the most attention, including: state-owned retail bank Sberbank, internet search engine giant Yandex and supermarket chain Magnit among the most popular names, according to BCS.
Eyes on Gazprom
The state-owned gas giant Gazprom has started to pique investors’ curiosity and as is a possible candidate for good returns this year. The compa- ny’s stock has been an under-performer for most of the last two years and had a particularly bad year in 2018, having lost some 30% of its value.
However, things are about to change significantly for the company’s business. On February 27 the company announced construction of the Power of Siberia gas pipeline to China is now “99% com- plete” and it expects to start delivering gas over the border from December this year.
At the same time the company said this month that 700km of the 1,200km Nord Stream 2 pipe- line is now complete, and recently moved up the completion date from the start of 2020 to the end of 2019.
Gazprom has been investing a record RUB1.1 tril- lion in these big construction projects, but as the capex on them falls away at the start of 2020 the company will have significantly more free cash to share with its shareholders – including the cash strapped government that is keen for all state- owned enterprises (SOEs) to pay 50% in dividends.
And Gazprom just hinted that it would pay record dividends its 2018 dividend payments, up from the 20% dividend yield it has paid in the last two years, blaming the low level on the need for investment into its mega-pipeline projects.
“The high yield in favourites means all eyes are on Gazprom, but investors are still not overweight in the name. Lukoil and Tatneft prefs seem to be everyone’s choice now thanks to a decent yield either in the form of dividends or buyback,” says Tachennikov. “Gazprom was frequently the centre of discussion, but although the street agrees that downside is limited, concerns about future capex plans, dividend per share (DPS) and the impact
of the new mineral extraction tax (MET) still limit exposure to the stock.”