Page 9 - bne_newspaper_March_08_2019

bne Invest
March 8, 2019 www.intellinews.com I Page 9
Will Rusal shares ever recover from the sanctions hit?
IntelliNews Pro
In December the US Treasury Department
(USTD) dropped sanctions on Russian aluminium producer Rusal as part of a deal that saw owner Kremlin insider Oleg Deripaska reduce his ownership below a controlling stake in what is the first time any sanctions have been dropped since Russian annexed the Crimea in 2014.
As part of the April 6 round of sanctions US investors were banned from doing business
with Rusal or owning any of its securities. The move caused chaos on the international metal markets and threatened to cost Rusal’s bond and shareholders hundreds of millions of dollars as markets reacted, causing the USTD to first delay the imposition of the sanctions before dropping them entirely.
Now Rusal has been given a Persilschein by
the US authorities, the Morgan Stanley Capital International (MSCI) index said that Rusal,
along with other assets belonging to Deripaska, including energy holding EN+, may be included into the MSCI Russia benchmark index that would make them mainstream Russian investments.
The company’s stock, listed on the Hong Kong exchange, was obviously walloped by the imposition of the April sanctions, falling from HK$5.7 at the start of 2018 to HK$1.66 by April
15 as the market digested the sanctions news. The shares spent the rest of 2018 trading at about HK$2 until it became increasingly clear that the sanctions would dropped at the end of the year after Deripaska mounted an effective lobbying
campaign and did a deal with the US authorities. YTD the stock is up 3.6% and trading at HK$3.7 as of the end of February.
Inclusion in the MSCI Russia index would give the shares another boost but despite the removal of sanctions the stock is still trading well below where it was and where it should be. Investors remain nervous, but analysts are upbeat.
“For us long Rusal looks attractive for the following reasons: Rusal market cap of $6.9bn is well below the market cap of its 27.8% stake in Norilsk, which is worth $9bn; Rusal is free cash flow (FCF) positive and has a price-to-earnings ratio (p/e) of 3.7x compared to the median of 11.75x for its peers; and bulge bracket banks will resume coverage after US sanctions lift,” says Vyacheslav Smolyaninov, chief strategist and deputy head of research at BSC Global Markets.
Clearly there is a huge arbitrage deal to do
in Rusal. If an investor bought the company
at its current valuation, threw the aluminium business away and just sold the Norilsk Nickel stake at market rates they would clear a $2bn profit without doing anything with the rest of the company, which is itself highly profitable.
The market is playing catch and it is symptomatic of the sanctions of Damocles that are still hanging over the Russian capital markets that Rusal is still so clearly undervalued. A new round of “crushing” sanctions are being debated by the US Congress and will probably enacted in April, which could