Page 53 - IFR Opportunities in Russian capital markets

CHAPTER03
ifrintelligence reports/Opportunities in: Russian Capital Markets
Pricing challenges
The first round of IPOs enjoyed the novelty factor and also the fact that investors were keen to get away from the traditional oil and gas stocks. Early IPOs were up to 20 times oversubscribed and consequently very aggressively priced.
Only five of the 25 Russian IPOs between 2004 and the start of 2007 have performed better than the RTS. An IPO portfolio in that period would have gained 48%. A similar investment in the RTS would now be 86% higher, while equal investments in Gazprom would today be 185% better off.
Of the 15 issues in 2006, including the private placing of a 10% block of equity by the owners of Wimm-Bill-Dann Foods, six were trading below the issue price as of January 2007, while three more performed less well than the RTS index in the same period.
The best performing IPO since 2004 has been Open Investments, the real estate company that is part of oligarch Vladimir Potanin's empire. The continuing surge in the value of Russian real estate – residential prices were up 70% in 2006 – and the fact that Open Investments occupies an exclusive niche in the stock market, have supported its price. The company represents the only direct way for portfolio investors to get exposure to the real estate market.
The next best performer, with an IPO value of almost US$1bn and far bigger than Open Investments, was the independent gas producer Novatek. The rapid rise in oil and gas prices has strongly supported the investment outlook for the company during this period. But the main reason why this IPO was so successful was that it was very deliberately priced to succeed, as the owners accepted a discount in order to ensure not just a successful IPO exercise, but also a successful post-IPO market, according to analysts at Alfa Bank.
With equity investments so heavily weighted on the side of the oil and gas sector and the consumer sector so obviously on fire, anything that floated that was not a natural resources producer was significantly overbid. Consequently, buying Russian IPOs in the last two years has been a poor investment when compared only to the RTS index performance. The various perform- ances of IPOs are shown in Tables 3.6 to 3.9.
The almost doubling of supply (more than doubling, if Rosneft's de facto private placement is excluded) will take all the froth off the market and turn the tables from a sellers’ market to a buyers’ market in 2007. The return of risk aversion will only add to this trend.
With the first flush gone, bankers say that Russian companies are going to price their shares more aggressively from 2007 to ensure the success of their flotations.
Table 3.6: Performance of IPOs issued in 2006–Jan 2007 (US$, %)
Total raised (US$m) IPO price (US$p/s) Current price* (US$ p/s) Gain/loss (%)
Comstar-UTS 1,062.00
7.25 13.00 4.80 28.00 27.00 15.25 14.00 7.55 5.40 0.09 10.70 167.50 12.50 2.25 37.50
8.70 20.0 9.78 -24.8 4.40 -8.3
37.00 32.1 36.10 33.7 13.40 -12.1 21.70 55.0
8.93 18.3 8.70 61.1 0.13 43.3
13.20 23.4 160.00 -4.5 12.77 2.2 1.93 -14.2 61.00 62.7
Trader Media East Razgulyai Veropharm Magnit Cherkizovo
650.00 144.00 140.00 368.00 251.00 381.00
CTC Media
Rosneft 10,656.00 TMK 1,084.00 OGK-5 459.00 Sistema-Hals 432.00 Chelyabinsk Zinc 324.00 Severstal 1,222.00 Raspadskaya Mine 317.00 Wimm-Bill-Dann 165.00 Total 17,655.00
Prices as at close January 26, 2007
Source: DataStream, RTS
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