Russian IPOs – Review of the 2007 10th week

THIS POST WAS ORIGINALLY PUBLISHED MARCH 08, 2007

  A "knowledge absent" Russian Market – Is This True?

A very meaningful interview was published with John Connor, the manager of the Third Millennium Russia Fund. Its highlights are:

- the Russian market no longer offers cheap stocks associated with high risk. Rather, there are opportunities for participating in the high growth and domestically financed growth of a relatively stable market

- Russia is a very exciting place for investors to participate. Although it is usually associated with high political risk, Russia a stable free market.

“ It is a democratic country with a limited number of political parties and policies, which provide real choice. I am also impressed with the highly literate, ambitious, and capable people”

- The interesting sectors currently are consumer products, real estate, retail, mortgage banking, and cell phone companies.

- There are about 60 investable companies in Russia, but five years ago there were only 20.

And this correlates with the thoughts of Dr. Marc Faber in his INVESTMENT HOCUS POCUS .

“Currently, looking at the five most important asset classes - real estate, equities, bonds, commodities, and art (including collectibles) - I am not aware of any asset class that has declined in value since 2002! Admittedly, some assets have performed better than others, but in general every sort of asset has risen in price, and this is true everywhere in the world. Emerging stock markets and economies …. have performed substantially better than US asset prices. Since 2000, the Dow Jones has lost more than 50% of its value against gold and much more against industrial commodity prices. Moreover, since 2002, the Argentine and Russian stock markets, whose economies are perceived as "knowledge absent" when compared to the great "knowledge-based" American economy, are up ten-fold or more!”

OK, now let us have a look at the "knowledge absent" Russian market.

No Risks in 2008 Elections

Dmitry Vasiliev, J.P. Morgan Managing Partner, reiterated in his interview to VEDOMOSTI Daily that the upcoming 2008 presidential elections pose no major political risks to investors. In his opinion, the political vector is influenced by the requirements of the country’s economy, and any politician (a deputy or the President) would still consider this as his priority. I guess this is true – I have heard the same opinions during businessmen and government officials’ discussions in October at one of the IPO conferences in Moscow.

New LSE Rules for Russians?

United Energy Systems (UES), Russia's state-owned electricity monopoly is trying to persuade the LSE that it should waive one of its rules so the operator can list some of its regional companies on the UK market without presenting three years of accounts. This is a very interesting move. The commentaries are different, but everyone is watching the development with the great interest. If this succeeds, well, that might set an interesting precedent.

COME BACK, BABY COME BACK….

Two big players return to Moscow after their 1998 retreat. Lehman Brothers is opening its office. And Japanese Nomura bank comes back and opens its offices in Moscow next week. The bank plans to participate in IPOs, provide investment banking services for institutional investors and would not be engaged in brokerage or trading services. The Russian analysts are skeptical of the good chances for the bank, providing that a number of big players like Goldman Sachs, Morgan Stanley and Merrill Lynch are already in place.

UBS highlighted its favorite five investment ideas for the Russian market

UBS Russian Top 5 portfolio for March:

- Lukoil - a 40.7% weighting

- Unified Energy System (UES) - 22.2%

- Norilsk Nickel - 29.2%

- Evraz - 23.5%

- Sberbank - 15.9%

Wood and Timber News

The Russian Government continues its activities to minimize the raw material export from Russia. Minister of Natural Resources Yuri Trutnev is calling for a reduction in the export of timber, replacing that trade with "highly processed wood products." It was reported that as many as 16,000 of a total of 36,000 lumber operations are timber exporters.

Wall-Mart in Russia

The hypermarket chain Karusel is in indirect talks with Wal-Mart through a certain investment bank, - it was reported this week. Karusel operates 19 hypermarkets; its revenues are $361 million in 2006. The company has the plans to operate 59 hypermarkets by 2011. This is another event in the process of consolidation of the Russian retail market. Recently X5, took over Metronom AG and added 16 stores in Moscow.

Privatization Goes On

First, energy. We learned that the Unified Energy Systems (UES) expects to get some $11.5 billion after taxes from the sale of government stakes in its OGKs (GenCos) and TGKs (DisCos). UES plans to transfer its stakes in generating companies into the Federal Grid Company (FGC), which will then sell these stakes to strategic investors via auction. UES expects the government to end up holding more than 80% in FGC.

And Telco developments too. The Russian government has auctioned off a 4.6% and 7.2% block of shares, respectively, in the regional telecom providers Uralsvyazinform and Central Telecom. That brought $103.1 million and $110.3 million, respectively. It is not known however, who bought these stakes; private individuals and corporate entities participated – that was the only information supplied.

New IPO candidates

- Renova-Media - IPO sometime after 2008.

- Inprom, steel-trading company- IPO on MICEX and the RTS

- SOVCOMFLOT and NOVOSHIP, the biggest Russian ship companies are merging and planning IPO in 2008

- EmAlyans, machine-building company – IPO in 2008

- SIBUR, petrochemical holding – IPO in 2007

- Wild Orchid, the lingerie retailer sold a 20% stake sold to Wermuth Asset Management for $50 million and declared of IPO plans in 2009

- PIK Group of construction companies – IPO in nearest years