Page 4 - bne_October 2018_20181001 SPF Russian stock stories

36 I Special focus bne September 2018
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state backing, means the bank’s shares have become something of a “tourist stock” – if you are going to Russia and have to invest into something because Russia is in your index, then you buy Sberbank before you buy anything else.
Sberbank reported a whopping 38% year-on-year increase in IFRS net profit in 2017 to RUB748.7bn ($13.3bn)
and another RUB202bn in the second
quarter of this year for a strong 23% return on equity. And Gref said earlier this year he wants to bring the bank’s profits up to RUB1 trillion a year soon.
Dividend payments have been
rising even faster than profits. The bank made a record-high dividend payment of RUB271bn ($4.4bn) for 2017, doubling the 2016 payout of RUB135bn in absolute terms. "I think
[Sberbank shares] were one of the
most profitable investments of last year," Gref boasted, as cited by Interfax. That’s a dividend yield of 36% for 2017, up from 25% paid in 2016.
Analysts are speculating that Sberbank could start paying a 50% of profits dividend yield as soon as next season.
Despite the more than doubling of the bank’s share price from a low of $4.17 in 2015 to $10.89 as of the end of August, analysts still have Sberbank marked as
a buy and 102% upside potential on its target price of RUB360.
But there is another name that has attracted investors’ attention in the banking sector: Tinkoff Bank is a minnow to the Sberbank whale. The bank was set up as Russia’s first pure online-only bank by serial entrepreneur Oleg Tinkoff, and it has flourished. The idea was that by eschewing the Central Bank of Russia (CBR) regulated bricks and mortar of a traditional bank the bank could significantly cut its costs
and so undercut every bank on the high street. Starting out by just offering credit cards that carried lower rates than the rest, the bank has grown fast as Russia’s retail sector increasingly goes online.
The bank IPO’d in 2013 raising $1.1bn
at a start price of $17.2 per share, but
it was caught up in the firestorm that followed the Kremlin’s annexation of the Crimea in 2014 when its stock fell to $1. Since then as frayed nerves repaired themselves investors have come back from looking at Russian banks as just “Russian” and are focused again on the “bank” bit. The share price is one of the very few that has made back all its losses from 2014 and reached an all time high of $21 in the summer.
The appeal of Tinkoff is it is part Russian consumer bank and part tech play. Russians are embracing online banking and without infrastructure costs, Tinkoff is very profitable.
Analysts also have Tinkoff marked up as a buy, although with a target price of $28 the potential return is a more modest 39% at the time of writing.
Retail’s battle of the Titans: Magnit vs X5
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air markets and “Produkti” corner stores are largely things of the past and after
a decade of growth, Russia’s leading supermarket chains have maxed out their store opening potential and are starting to run up against structural limits to their growth. Two giants of the business have emerged, Magnit and X5 Retail Group, and they are battling it out for the top slot.
Retail has long been the dedicated Rus- sian investors’ favourite sector as it is largely apolitical, home to few oligarchs and has prospered on the relentless rise of Russians’ average income. At one point about three years ago Magnit’s stock accounted for a third of the entire MSCI Russia overweight in investors’ portfolios by itself.
Having eschewed the glitzy life in Moscow, its owner and founder
Sergei Galitsky was the epitome of
the serious businessman who built up
a multibillion dollar retail chain by focusing on Russia’s far f lung regions rather than the capital, allowing him
to tap into the 143mn strong population. The company’s stock grew inexorably as not only was Magnit the biggest, it was also the best managed with the highest profit margins and juggernaut- like growth.
But the story fell to pieces last year when internal disputes over direc-
tion tore the team apart. The fall in incomes following the deep devalua- tion of the ruble in 2014 hurt incomes in the regions more than the cities that rival X5 had traditionally concentrated on. Galitsky sold 29% of his stake for RUB139bn ($2.4bn) to state-owned bank VTB on February 16, after X5
rganised retail is one of the most sophisticated parts of the Russian
economy. The Soviet-era open
overtook Magnit to become Russia’s largest retail chain in terms of turnover. In 2017 X5’s stock doubled in value while that of Magnit stayed flat.
Now investors’ interest in Magnit has perked up again. Both firms have recent- ly reshuffled management and Magnit has brought in some seasoned profes- sionals from X5 to restart its strategy.
X5 reported strong results in the second quarter, whereas Magnit is yet to see a pick up in its second quarter results, but analysts are increasingly keen on the company as a turnaround story and its appeal to portfolio investors is on the
up again.
The game will get harder now as
the competition is fierce. X5 has just launched its first “dark store” – a retail outlet that is dedicated to serving online orders and has no physical customers. The company is also in talks with Chi-
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nese online store JD.com to set up a joint venture in Russia. For Magnit’s part, it is eyeing a takeover of SIA Group, one of the largest pharmaceutical distributors in the country, from Marathon Group,
as a way of diversifying its revenues.
But recently appointed Magnit CEO Olga Naumova says she will boost Magnit’s market cap “several-fold” and she has built up a formidable reputation at X5 that, “suggests she has all the chances to succeed,” says Vyacheslav Smolyaninov, chief strate- gist and deputy head of research at BCS Global Markets.
The other name in the sector to watch is Lenta, the third placed supermarket chain. While it is much smaller than the two titans, it is very profitable.
Lenta reported strong IFRS results for the second quarter of 2018, broadly
in line with previous guidance, and
has also maxed out on store openings. Gross margin expanded 20bp y/y on better purchasing terms and improved promotional activity, and its net margin remained flat due to lower interest expenses.
The stock of all these leading companies has fallen this summer on the back of the geopolitical brouhaha, presenting an entry point, argue Moscow-based analysts.
X5’s stock is down 27% YTD after the company reported disappointing first quarter results and the departure of top
managers, which came on top of the worsening sentiment towards the Russian food retail sector.
Lenta’s stock fell 16% in August alone
– more than the index – and is start-
ing to look very cheap. Sberbank CIB has marked the name up to Buy as a result, with a 12-month target price of RUB6.00 and an estimated total return (ETR) of 41%, which is still less than the ETR of 60% for X5 but a lot more than the 10% return expected for Magnit’s local shares.
INTERVIEW:
Tinkoff Bank builds a virtual lifestyle bank
Vadim Dumesh in Paris
Tinkoff Bank is the new kid on Russia’s banking block. At only 11 years old it is a relatively late entry into the sector, but analysts have already made it one of their “high conviction” stock tips for this year.
Russia’s only purely online bank, Tinkoff claims to be the biggest pure internet bank in the world.
Hot for tech, investors ploughed into its London October IPO in 2013 when the bank raised $1.1bn, floating at $17.2 at the top of the range, valuing the bank at $3.2bn. It was the last IPO before Russia annexed the Crimea the following May and abruptly brought the party to an end. As the political crisis morphed into an economic “perfect storm”, the bank’s share price fell to close to $1.
It's been four years since then but by last November the share price had recov- ered all the ground lost and was trading at more than $21 at the time of writing at the end of January – one of the few Russian stocks to have listed since the recession started that is trading ahead of its IPO price.
Read the rest of this interview on bne here:
www.intellinews.com/interview-tinkoff-bank-builds-a-virtual-lifestyle- bank-135974/?source=russia
Maxim Evdokimov, VP, Chief Digital CX Officer, Tinkoff Bank
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