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Russian Stocks: Potential Windfall or Disaster

Russian stocks are currently trading cheaper than half of their book net asset value...

Published: May 23, 2014 (Issue # 1812)



  • Gazprom claimed to have become the worlds most profitable company after releasing its 2013 IFRS financial statements.
    Photo: Sergei Porter / Fotoimedia

Foreign participants of the St. Petersburg International Economic Forum should give the Russian stock market a closer look. According to analysts, Russian companies are now massively undervalued, presenting a huge opportunity to investors brave enough to grab it.

Russian stocks are currently trading cheaper than half of their book net asset value, levels not seen even in troubled Egypt, said Martin Graham, chairman of London-based Oracle Capital Group and former head of the London Stock Exchanges AIM international market.

There seem to be more reasons than ever to avoid Russian stocks Russias confrontation with the West over Ukraine risks spilling over into damaging sector-wide economic sanctions; Russian growth has stalled to near zero; and the old bugbears of corruption, arbitrary courts and poor corporate governance have gone nowhere. But given the incredibly low price of Russian stocks, logic may in fact err on the side on investing.

Take state-controlled gas firm Gazprom, Russias biggest company. Releasing its IFRS financial statements for 2013 last month, Gazprom said it had surpassed Chinas Petrochina and the U.S. ExxonMobil and Apple to become the most profitable company in the world by EBITDA, earning a little over 2 trillion rubles ($58 billion) last year.

But despite this, Gazprom stock is trading at a price-earnings ratio of less than three. On May 21, the company had a market capitalization of $99.6 billion.

Russian companies are chronically undervalued, according to Graham: In terms of earnings Russian stocks are traded up to four times cheaper than other emerging markets, while providing the shareholders with four percent dividend yield, among the highest globally, he said.

The government has been trying to reverse the negative perceptions giving investors cold feet for years, with the International Economic Forum in St. Petersburg being one of the prime examples of the effort. But while the spat over Ukraine has stoked anxiety, the overall trend was set long time ago.

Geopolitical risk perceptions driven by the Ukraine crisis have contributed to low valuations. But even before the Ukraine crisis, Russian equities declined because of slowing economic growth and corporate governance risks, in particular in state-controlled companies, said Dmitry Alimov, founder and managing partner of Frontier Ventures, a venture fund investing in Internet companies.

One of the effects of this unwillingness to buy Russian shares is to make the government more reluctant to privatize its assets. For instance, Russian flagship airline Aeroflot has repeatedly delayed its privatization, citing low valuation and market volatility. In December, Aeroflots CEO Vitaly Savelyev told Bloomberg that the companys shares are about 40 percent undervalued.

Even Russias Internet and technology sectors, whose companies have traded better than other firms, currently trade at substantial discounts to pre-crisis levels, according to Alimov. Shares in Yandex, Russias leading internet search engine, plunged in early March, when the State Duma gave President Vladimir Putin permission to use military force in Ukraine. They then plummeted again in late April, when Putin hinted that Yandex had been subject to unfriendly influence by foreign powers, though the company has recovered some of the looses since.

The relentless downward trend cannot continue for ever. At some point, valuations will fall far enough to make investors reassess the market.

Russia was abnormally cheap even before the Ukrainian events, we see it as a sign of an oversold market. If Russian stocks discount to emerging market peers squeezes at least by half, this could lead to over 50 percent growth from current levels, said Ghaham.

The key unknown in this picture, however, is the timing, he added.





 


ALL ABOUT TOWN

Friday, Dec. 19


Test your mastery of parlor games during Game Evening at the British Book Center. Learn how to play a variety of classic, mentally challenging games and use your newly acquired skills to crush weaker opponents. The event beings at 5 p.m.



Saturday, Dec. 20


The citys Babushkina Park on Prospekt Obukhovskoy Oborony will be invaded by dozens of rocking-and-rolling Santa Clauses during todays Santa Claus Parade. Not only will they parade through the park but there will also be competitions amongst the festively-clad participants and a musical master class. There will also be a prize for the best-dressed Santa Claus.


Stock up your record collection during the Vinyl Christmas Sale at the KL10TCH bar on Konyushennaya ploschad today. Spend the afternoon perusing the records for sale while listening the classic, clean sound of records spinning out hits from a variety of musical genres and time periods.



Sunday, Dec. 21


The Zenit St. Petersburg basketball team returns to the northern capital this evening for a matchup with Krasny Oktyabr, a Volgograd-based basketball club. Tickets for the game, which tips off at 6 p.m. this evening, can be purchased on the clubs website or at their arena, Sibur Arena, on Krestovsky island.


Satisfy your sugar cravings during Sweet New Year, an ongoing seasonal festival at the Raduga shopping center. Each weekend of December will welcome hungry visitors to taste hundreds of different kinds of desserts made from a plethora of sweet treats. Workshops are open to visitors and seasonal gifts can also be purchased for those rushing to finish their New Year shopping.



Monday, Dec. 22


Pick out the latest fashions as holiday gifts for loved ones or as early presents for yourself during the Christmas Design Sale at Kraft on Obvodny Kanal, starting on Dec. 20 and continuing through Dec. 27. Designer clothes will be on sale every day of the week or you can buy something more festive to decorate the home while sipping on hot coffee and perusing the various master classes.



Tuesday, Dec. 23


Meet Arctic explorers Fedor Konukhov and Viktor Simonov during SPIBAs and Capital Legal Services event Arctic Expedition this morning in the Mertens House business center at 21 Nevsky Prospekt. The meeting will discuss the explorers ongoing eco-social project and how companies can use the project as a unique marketing opportunity. Email office@spiba.ru by Dec. 22 if you wish to attend.



Wednesday, Dec. 24


The Anglican Church of St. Petersburg we will be holding a Christmas Eve service at 7 p.m. led by Rev Wm. Shepley Curtis of the Episcopal Church. The service will be held at the Swedish Church at 1/3 Malaya Konyushennaya Ulitsa.



To have your event included in All About Town, email tot@sptimes.ru



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