Russia's RTS Index futures - liquid tradable instrument.

Morning Comment - 05.08.2010

Good morning! In this sticky and smoldering heat :( of Moscow there are 2 things that I will mention:

* If you look at the dynamics of EM Indices (Bovespa and RTS) vs developed markets indices (FTSE and S&P) you will quickly notice that EMs re-gained much more of the territory since April tops %-wise. This is important as it tells you that EM Beta is back on the way up.

* I, for one, will be closely following Barclay's statement, no just for earnings but more importantly, for Varley's defense of old-style banking system. Tories did much to restore market confidence showing they are “tuff enuff' and forming Osbourne's commission that will consider whether the biggest banks' retail and IB operations should be divorced. I really want to hear how Varley will keep that confidence boost AND defend old merchant-banking ways :)

RUSSIA: VTB is in talks with investors from the Persian Gulf to buy a stake in the bank's capital. Russian banking shares look attractive in a long-term, but we believe that it will take long until the real deal is clinched. At the same time, marketing of the bank and discussion of a possible transaction with investors will increase activity in VTB shares as we saw on Wednesday. Now VTB is traded with a 20% discount to Sberbank, which is determined by different revenue structure, lower efficiency and higher risks of the former related to its loan portfolio. In early September the banks will publish their 1H10 IFRS results that may lead to the current spread conversion, if VTB shows stable performance of its core business as well as investment business and improvement of credit quality. We keep our HOLD recommendation for VTB with a target price of $5.2 per GDR.

Good trading to you!
 

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Morning Comment - 06.08.2010.

Good morning. Best way to describe this Friday morning is “gone fishing” :) Especially in Moscow where the town is smogged out by burning turf and sod of grass from the outskirts. And with the desk reduced to some gruesome twosome :) you are left to mull what the market direction will be into the Autumn.

Barclays – or its IB rather - did disappoint yesterday but it did not stop the market from being buoyant. Government plans for lending targets – well we have two camps now, with Barclays and HSBC saying “we are being exhorted to lend, but we have to lend prudently”, and RBS and Lloyds agreeing to set those targets. This will be an interesting tussle to follow, and much in the banking sector, and confidence in the market in general, will hinge upon it.

RUSSIA: - forbids export of grain, worst thing is that God knows when the ban will be lifted. Novorossiysk Commercial Seaport (NCSP LI) will probably be negatively affected.

Good fishing to you! :)
 
Morning Comment - 09.08.2010.

Good morning! A bit hard to write a morning comment – literally – amid acrid smoke from forest and peat-bog fires east of Moscow. Just one quick observation in this shroud of smoke:

S&P’s price action into the close on Friday was quite supportive of our bullish stance. These -10/+10 days on S&P normally say a thing or two about the market direction. US tanking 10 points or so in the early going due to a slab of what is perceived to be bad news, and then regaining ground into the close, is a sort of set-up where I, for one, would hate to be short :)

It will be a quiet week by all means – and in Moscow – painfully hot. Good trading to you.
 

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Morning Comment - 10.08.2010.

Good morning! As Bolsheviks used to comment on the defeats of the Russian Army in WWI – “The worse, the better”. What they obviously meant was that the weaker the Tsar was, the better were their chances to grab power.

Yesterday’s market flavour was not much different from that Bolshevik logic :) There is plenty of speculation round that weaker jobs growth in the U.S. will prompt the Fed today to extend efforts to shore up US economy. The worse, the better :)

What I liked loads yesterday was Europe’s largest publicly traded fund management company, Schroders Plc, rallying back to the tops of May. Main thing here is that net inflows from investors jumped ahead of the expectations – and this is perhaps the “purest” gauge of “intrinsic” liquidity in the market.

RUSSIA: We maintain our HOLD recommendation on Seventh Continent (SCON RU). Yesterday Seventh Continent disclosed its July retail sales, which showed a 5% y-o-y increase in ruble-based revenue (on gross basis) and 4% y-o-y growth in 7M10 gross revenue in ruble terms. Seventh Continent’s shares are now trading with almost a 40% discount to Magnit and X5 Retail Group on the basis of 2010E EV/EBITDA, which may be explained by the relatively slow growth pace of the company’s fundamentals. Its management has previously guided the market that this year it will open 3 hypermarkets (in Vologda, Obninsk, Reutov) and 11 supermarkets (in Moscow and Moscow region), and close 3 supermarkets (last year retailer opened 5 stores including 2 hypermarkets, and closed 3 stores). Taking into account that since the year beginning Seventh Continent has managed to open only 3 new stores, we see such plans to be overly optimistic. We maintain our HOLD recommendation on the stock with end-2010 target price of $9.6 per share.

Good trading to you!
 

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Morning Comment - 11.08.2010.

Good morning! Thanks to Lord Almighty Moscow heat has subdued a bit, there is hardly any smog in the air and we can all breathe now – well sort of :)! Looks like that Russian equity market will follow thermometers to the south in the short term, but we DO HOPE to see a huge divergence in the nearest future – and here is why.

There is a tug-of-war left unfolding in the market after Fed yesterday:

· Fed’s re-investment of principal payments on their mortgage holdings into long-term Treasuries has all but ONE consequence – REDUCTION OF BORROWING COSTS throughout the economy, and this additional liquidity is mega-encouraging.

· Yes, Fed’s intention is to show markets that their foot is firmly on the accelerator. However, the mere fact that they had to start letting the dog out – well it is their attempt to bolster growth IN MORE THAN A YEAR (!!!) makes one wonder if economic recovery is likely to be even more modest than the sort of modesty bulls would be comfortable with :)

I still do firmly believe that bears will be washed-out by this wake of liquidity. But this rose may have more thorns in it than bulls might expect short-term. In short, BUMPY RIDE into the Fall.


Negative opening on Russian and European bourses will be no surprise after Fed’s wording on recovery’s modesty :); add to that disappointing Japanese machinery orders data, China’s industrial output figures and sliding commodities that are just adding pressure on EMs. Note, that SPX index still holds steady in lying position on the 200-day MA, while Russian RTS has some 2,5% space to fall to it’s 200-day MA.

COMMODITIES: we call cutting long exposure in base metals. On the 20th of July we advised to take long exposure in nickel. Although investment horizon was initially estimated as 6 months, we call taking profit (some ~20%) now. Since the idea has been aired out, LN1 grew by 20,75% on LME, while nickel’s ETF (NICK LN Equity) grew by 21,9%.

RUSSIA: Car and LCV sales added 48% y-o-y in July. Sollers (SVAV RU) is the best one across the Russian car makers’ board in 7M10 (also see attached). Domestic producers in Russia (excluding IzhAuto) outperformed the whole car and LCV market recovery over 7M10. Thus, Sollers vehicle sales advanced 34% y-o-y to 39,081 units mostly due to strong demand for UAZ models (y-o-y increase of 45%). AVTOVAZ (AVAZA RU) boosted its car sales by 28% y-o-y to 272,599 units. The biggest Russian auto maker should recognize the impact of state cash for clunkers program, through which the company realized 34% of its vehicles over 7M10. GAZ Group’s (GAZA RU) results seem less successful – the company’s vehicle sales increased only by 12% y-o-y vs. the whole market growth of 9% y-o-y in January-July, 2010.


Good after-Fed trading to you :)
 

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Morning Comment - 12.08.201

Good morning London, good afternoon Moscow :) My apologies for a late morning comment – flying Aeroflot has its joys and its perils :)

I’ll be brief here. Yesterday’s trading sessions across the globe had all one common motto - ‘LOSS OF CONFIDENSE IN THE ECONOMIC RECOVERY’. What has changed in the world? – NOTHING. Pessimism – as high as it was, we commented on that before – jumped even higher. And that going hand-in-hand with 1) lots of cheap money in the market; 2) companies coming out good results, okay not spectacular across the board, but definitely above an “average” earnings season (some results from Russian companies below are quite in line with this notion); and 3) central bankers sworn on their willingness to support markets.

I am not going to be a darling in the eyes of many saying this today – but can hardly think of a better set-up for market – bubbling up again. In the meantime – I will have to repeat myself – BUMPY RIDE through thin summer markets. I can’t see anything apocalyptic in 30 points sliced off S&P yesterday.

RUSSIA:
- Raspadskaya (RASP RU) may start production at its main site as soon as October 2010. Now Mr Putin and Mr Tuleev (the Governor o Kemerovo region) are discussing how to speed up the approval process in Novokuznetsk to resume “partial” mining. That is driving up the stock. The deposit will start working at full capacity in 2011-2012 (as expected). Attention from the government to the company is a POSITIVE fact;

- Wimm-Bill Dann (WBDF RU) will BUY 18,4% of its shares from Danone; expected; POSITIVE; the price is $470mn; this implies $58.1 per share or 19% premium to the local shares prices;

- FESCO (FESH RU) showed considerable improvement of operating results in 1H10. POSITIVE;

- KAMAZ' (KMAZ RU) profitability improved in 2Q10 due to truck sales recovery. POSITIVE;

- Cherkizovo Group (CHE LI) reported 1H10 operating results. POSITIVE

Yesterday's trading activity was subdued in blue chips as most of clients took their long bets off in previous days and do not go short at the moment. Yet, we saw some sellers - several domestic accounts - were cutting their long exposure in ROSN, GAZP closing long call options; we had also sellers in Nickel (commodity) calls; at the same time specific value stories are in good demand – such utility names as TGKG, KRSG, TGKM, IRGZ, KZBE, MRKK, TGKF are well bid across the board and we keep on having them in our buy lists for many days, having already bought quite a bit; the seller goes on in OGKA, VRAO, TATNp, NNSI, URSIp, NVTK; international accounts tend to take risk in many illiquid issues though such as BRZL, AMMO, LSNG, Germany listed Ukrainian GDRs; have demand for such forgotten names as BTSTp.

Good Trading to you!
 

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Morning Comment - 16.08.2010.

Good morning! Common logic would perhaps tell one the following this morning - Asian shares falling, why? because data showed Japan's economic growth stalled in the second quarter, meaning what? adding to worries that a global recovery is quickly faltering. Natural conclusion to that is investors rushing to sell riskier assets.

Meaning one should expect a steep slide in the mother of all riskier assets :) - EM equities.

This may well be the case on a day-to-week time spans, but my take here is that IF that slide indeed happens, it will just serve you with a "wicked" long entry point on a plate :). I am speaking to a lot of people mulling increasing the size of their EM equity portfolios and I can definitely say that both "selective" (!!) risk appetite and money to feed that appetite are firmly there. That "selective" risk appetite somehow - and I recall first half of 2003 in this set-up - goes hand-in-hand with an extreme level of pessimism GENERALLY.

We all know how this set-up unfolded into 2nd half of 2003 and onwards :)

RUSSIA:

- Bank Vozrozhdenie (VZRZ): 2Q10 IFRS results preview. NEUTRAL;

- Lukoil (LKOH) released 1H10 production statistics, updated on debt raising. NEUTRAL;

- Novatek's (NVTK) 2Q10 IFRS results - in line with consensus. NEUTRAL;

- Buryatzoloto (BRZL): strong financial performance in 1H10. POSITIVE High gold prices, production growth and ruble depreciation helped the company to increase net income in 2Q10 by 44% q-o-q. We positively view the published numbers and consider the shares of Buryatzoloto as one of the most attractive among gold mining companies on the world market;

- Ulan-Ude Aviation Plant (UUAZ) and Kazan Helicopters (KHEL) posted strong 2Q10. POSITIVE;

- MSZ (MASZ) and NCCP (NZHK) released weak 2Q10 financials. NEGATIVE;

- We put MSZ and NCCP under review. Thereby, the whole 1H10 companies' financials provide downside risks for our full year forecasts, to less extent for MSZ and to larger extent for NCCP. We put both companies under review and plan to release updated forecasts soon. Our current end-2010 target prices for MSZ and NCCP amounted to $325/share and $11/share, respectively. At the same time, we note that both MSZ and NCCP trade with a 50-70% discount to foreign peers on a basis of 2011E P/E of 4.4 and 6.5, respectively;

- MRSK Holding (MRKH): inclusion into MSCI Index is under question. NEUTRAL MRSK Holding is a potential candidate for inclusion into the MSCI Index. MSCI Barra will publish the results of the quarterly index review this week. According to our estimates, one of the most likely candidates for inclusion into the MSCI index is MRSK Holding. Despite the fact that the holding meets all the requirements for full capitalization (minimum is $ 2.9 bn, in a case of MRSK Holding - $6 bn) and for free-float adjusted market capitalization (minimum is $1.5 bn, in the case of the MRSK Holding - $2.1 bn), we expect that MRSK Holding will not be included into the index this time, because in addition to the requirements for capitalization the company has to have the 12-month annual traded value ratio, which is the ratio of the average turnover to free float for 12 months, not less than 50%, whereas according to our estimates in the case of MRSK Holding this ratio is about 40%. In our calculations we assumed that the company's free-float is 35%. The premium may decline. At present time, MRSK Holding's shares are traded with a premium to the sum of its parts exceeding 20%. In our view, in the case of a negative decision on the inclusion of the company's shares into MSCI index, the premium is likely to decline significantly;

- We have revised our Raspadskaya's (RASP RU, BUY) fair price due to recent positive officials' statements concerning restoration works on the key coal mine. They are in line with our expectations and lead us to increase our company's operating and financial forecasts. As a result, we have raised our fair price by 12% to $8.5 per share and maintained our BUY recommendation.


TRADING ACTIVITY:

After volatile swings in previous days, market took a break on Friday. Despite weakening crude oil, weaker ruble - Russian blue chips spent most of the day in a rather narrow band. We had sellers in GAZP, TRNFP; had good trading activity in utilities sector, especially in TGKF, TGKE, TGKI, OGKA; saw support in HYDR, MRKH; in telecoms we had size trades in RTKMp, seller goes on in NNSI, NNSIp.

Good week ahead to you!
 

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CORRECTION: Morning Comment - 16.08.2010.

Pls accept my apologies for the typo in my last post – I obviously meant 2004, not 2003 in my comparisons. Respective sentences should read:

" That “selective” risk appetite somehow – and I recall first half of 2004 in this set-up – goes hand-in-hand with an extreme level of pessimism GENERALLY.
We all know how this set-up unfolded into 2nd half of 2004 and onwards :) "
 
Morning Comment - 17.08.2010.

Good morning! Boring summer-thin markets by all means. Probably a good point to step back and reflect on the fact that we are trying to recovery from the longest and deepest recession since the 1930s! Not only that but also from the sort of % swings from heaven to hell (2000-03 and 2008-09) matched again only by the Great Depression! And for that matter, we are doing quite well in this bumpy recovery!

RUSSIA:
- Sberbank (SBER) RAS numbers over 7M10 - achieving the targets. NEUTRAL We keep our BUY recommendation for Sberbank shares;

- Lukoil (LKOH) purchases its 7.6% stake from ConocoPhillips. POSITIVE Lukoil buys 64,638,729 its shares from ConocoPhillips;

- Novatek (NVTK) launches new infrastructure at Yurkharovskoye. NEUTRAL Yesterday Novatek announced that it completed and launched an unstable gas condensate de-ethanization unit at its Yurkharovskoye field and a 326 km unstable gas condensate pipeline connecting the field with Novatek's Purovsky gas condensate processing plant. The new unit and pipeline will allow Novatek to de-ethanize and transport up to 3 mn tn of unstable gas condensate p.a. This will enable Novatek to eliminate the risks and costs associated with using third-party infrastructure and services and, thus, is generally positive news;

- MRSK of Siberia (MRKS) and MRSK of South (MRKY) posted 1H10 RAS financials. NEUTRAL We consider the results of MRSKs' as neutral and expect significant improvement in performance of companies following the transition to RAB-regulation;

- AVTOVAZ (AVAZ) posted good 2Q10 RAS financials as expected. NEUTRAL Car maker released quarterly net income for the first time since 3Q08 mostly due cash-for-clunkers strong sales;

- Rostvertol (RTVL) received net loss in 2Q10. NEGATIVE We put under review our recommendation for Rostvertol. The whole company's financial results for 1H10 showed positive y-o-y dynamic. Rostvertol's revenue advanced by 78% y-o-y to $119 mn, operating income - by 61% y-o-y to $16.3 mn, net income - by 23% y-o-y to $3.3 mn. Such improvements happen mostly due to strong 1Q10. We put under review our recommendation for Rostvertol (our end-2010 target price was $0.03/share). Currently the helicopter producer trades with a 36% discount to foreign peers on a basis of 2011E P/E of 7.4;

- Bamtonnelstroy (BTST) published weak 1H10 results. NEGATIVE Profit decreased due to construction works reduction and long construction periods.

TRADING ACTIVITY:
Yesterday we had a bit more active day with more sellers around. Domestic accounts were better sellers in chips since the very opening driven by negative sentiment of the overseas markets; in utilities activity was subdued - we had local clients selling KZBE (foreign account bought), VRAO, while foreigners were selling OGKE; have crossed some VSMZ (foreign account bought); close to the bell we were selling TNBP and BRZL (despite strong earnings release) for locals, at the same time we had buyers in BRZL's parent company HRG CN, that rallied by almost 12% yesterday in Toronto on very good 2Q results.

Do not get bored trading today! :)
 

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Let us not be scared of 17 August! :)

There is something ill-ominous about 17 August as 2 charts attached might attest to :)

Let us try to get thru it with flying colours! :) Good day to everyone!
 

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Morning Comment - 18.08.2010.

Good morning! As we expected MSCI Russia has not been changed. MRKH was not included into the index and we expect MRKH will be weak compared to RTS in the next couple of weeks.

One thing I noticed this week is that more and more "Bearded Prophets of Apocalypse" are entering the market. Once they get a couple of pips on the shorts they just opened, they double up. Fully in line with our notion that the level of pessimism is uber high in the market - and that happening in an ecosystem with 1) huge (and increasing) liquidity, 2) relatively good results from not only fancy gadgeteers but also from brick-n-mortar pillars of production; and 3) central bankers' determination to be there when they are needed. I, for one, think this may be a perfect set-up for another bubble.

AT THE VERY LEAST the market won't drop significantly before those clever prophets are squeezed out - and we are DEFO not there yet!

The more I look at this set-up, the more I feel that the global economic recovery may even accelerate as growth in developing nations counters a slowing pickup in the UK, US and quite possibly Japan. That increasing liquidity will probably help shield developed economies including the above from a double-dip recession.


RUSSIA:

* Severstal (SVST LI) has found a buyer of North American assets. POSITIVE. Renco Group is a potential buyer. According to Interfax citing foreign media sources, Severstal has reached a preliminary arrangement on the company's North American assets sale (Severstal Warren, Severstal Sparrows Point and Severstal Wheeling) to Renco Group holding company controlled by Amercian businessman Ira Rennert. As expected, the deal will be officially announced this week.

* Uralsib Bank (USBN) 1H2010 RAS financials - loan portfolio growth, stabilization of credit quality. NEUTRAL. Growth of operating profit was offset by high costs and taxes.

* Novatek (NVTK) provides an operating update and guidance. POSITIVE. Forecasting 12% y-o-y production growth in 2011. Yesterday, Novatek held a conference call on 2Q10 IFRS results, providing operating update and guidance. . Based on the current production level, Novatek confirmed that it will achieve higher end of production guidance for 2010 and is forecasting 12% y-o-y production growth (to 41-42 bcm) in 2011. More clarity on Yamal LNG project expected this year.

TRADING ACTIVITY:

Yesterday liquids were well bid during the day due to speculative liquidity which is galore, all of a sudden. SBER, VTBR, GMKN were clear prima donnas yesterday, we still see selling pressure in LKOH; strong demand for metals & mining sector on the SVST & RASP news; fertilizers were also in demand especially URKA & AKRN supported by global M&A news; most of those swings looked to us as highly speculative plays. In utilities sector we continue to be buyers of TGKE, F, I, G, KZBE, have buyers in OGKB, E, have traded a lot of OGKA, though have a big seller there at the moment; started to see some healthy demand for telecoms especially in RTKMP; we continue to be buyers in SVST, VSMZ, see sellers in VSMO; in helicopters keep on trading all 3 of them - RTVL, KHEL, UUAZ - the first two were being sold, while UUAZ is still in demand.

G'day to y'all! :)
 

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Morning Comment - 19.08.2010.

Good morning! Let us take a closer look at M&A department where things are brewing big time. You cannot underestimate the importance of this department for gauging market direction - as even M&A speculation is a confidence builder, say nothing about the amount of actual deals taking place. And confidence is "the weakest link" in today's environment.

BHP's Potash Raid puts this year on course to be the busiest for natural resources deals. Courtesy of a Bloomberg compilation - commodities companies, including miners, oil producers and chemical makers, have announced $362 billion of takeovers so far in 2010. If they maintain that pace, they will eclipse the record $576 billion of deals announced in 2007. Resources deals constitute 28 percent of this year's $1.26 trillion merger market, DOUBLE (!) their average share during the previous 10 years.

Why? Answer is clear - cheap money used to finance all-cash deals allowing to add reserves more cheaply than exploration. In addition, valuations haven't rebounded as fast as commodity prices - and there is a long way UP before they catch up, even if commodity prices tank.

Let us re-visit another "glove compartment" - IPO market. Attached is a chart of 5 most successful and 5 most unsuccessful IPOs over the past year - measured by % return over the past 6 months. And if you take into account the fact that by market cap the biggest winner is Hyatt, at 7 bil USD, and the biggest loser is Cobalt at 3 bil USD, and the only reason why CIE is a loser is because it happened to fish in the same waters as BP - you'll get the picture of IPO market slowly but steadily once again becoming a VERY lucrative "glove compartment" :)

I entirely agree with Mr Bittles that "the stock market got pretty oversold and is due for a rally".


RUSSIA:

- Core shareholder of LSR Group (LSRG LI) raised his stake to 62%. NEUTRAL. Expected news. Given SPO details, which were announced earlier in June, we do not expect considerable changes in the shareholder structure of LSR Group. In our view, news is neutral and will not have any impact on the share performance. We keep our BUY recommendation for LSR Group with the target price $11.4 per GDR and $57 per share;

- The Russian Railway freight transportation still outperforms the market in 7M10. NEUTRAL. But subsequently we expect to see the slowdown of freight traffic as a result of high base and slower growth rate of Russian industrial production due to drought;

- Bank Vozrozhdenie (VZRZ): 2Q10 IFRS results review. POSITIVE;

- Gazpromneft (SIBN) 2Q10 US GAAP: under pressure of costs. NEGATIVE.


TRADING ACTIVITY:

Yesterday we had a bit more active day with buyers and sellers equilibrium in terms of activity. Clients tend to avoid trading chips these days, though some guys were cutting their long exposure in ROSN (via derivatives), SBER, TRNFP; had sellers in TNBP, TRMK, AFKS after market opening; close to the noon domestic accounts were buying KMAZ, NMTP, AVAZ, IRKT, IRGZ; in utilities we had sellers in KRSB, OGKA, buyers in IRGZ, TGKI, KZBE, but start to see more sellers in distribution and territorial generation shares; yesterday we crossed pretty big size in a basket of utilities supply companies; in telecoms we crossed nice size in RTKMp & NNSI and continue to be sellers of NNSI; have buyers in PKBA.

In Frontier markets we were buyers of energos across the board - had a bid for quality size in CentrEnergo (CEEN UK), 2-way market in DonbasEnergo (DOEN UK). In steel sector we had a 2-way interest in size in ZaporizhStal (ZPST UK).

Good trading to you!
 

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Morning Comment - 20.08.2010.

Good morning! Disappointing day yesterday by all means - but I would not change a word in my yesterday's comment. Stock prices are still low, balance sheets are strong, cash flow is strong. There's a lot of cash in health care, commodity companies, and perhaps most importantly, in technology sector. I am happy for McAfee share holders, but what is a real McCoy here is that this is Intel's BIGGEST EVER acquisition!

Yep we can shave off another 2% on S&P in one day and yield to newspaper commentators calling it Armageddon :). But the more they drum up pessimism in an economy where things are not that bad really - and with this sort of M&A activity I'd actually call them quite good - you will probably need to be very much on your toes if you short this market into the Fall :)


RUSSIA:

- OGK-3 (OGKC) is considering additional share issue. NEGATIVE. The amount of mandatory investment program for OGK-3 is estimated at more than RUR100 bn. This is approximately by RUR17 bn more than the amount of cash, which was received during the additional share issue (RUR82 bn), placed by OGK-3 in 2007 for financing the investment program. We view the news as negative as if the company confirms SPO plans, it may put pressure on its quotes. However, we can say definitely that in the case of a negative resolution of the situation around RUSIA Petroleum OGK-3 will borrow much more. We note that at present the major part of the OGK-3 income is formed by investment funds on the balance sheet. Thus, in the coming years the company is poised to turn from the owner of net cash position into the company with the significant debt, which can also raise investors' concern regarding the upcoming SPO, especially if we take into account the quality of OGK-3 assets (one of the lowest capacity utilization rate among OGCs - 40% in 2009);

- MirLand Development (MLD LN) 1H10 IFRS results: still in the development stage. NEUTRAL. Generally they are neutral and in line with our expectations. The company is in the development stage and weak revenue is not the indicator of its inefficiency. Now more attention should be paid to asset value and efficiency of borrowings spending;

- AFI Development (AFID LI) 1H10 financials:
asset revaluation resulted in paper loss. NEUTRAL. BUY recommendation confirmed. We do not provide forecasts for 1H10 mainly due to fluctuating periods of revenue recognition which depend on terms of commission. In some cases, projects are commissioned in a year after their completion due to bureaucratic hurdles in construction sector of Russia. Therefore, we prefer NAV-based method of valuation. We forecast end-2010 NAV at $1,540 mn. We keep our BUY rating for AFI Development with a target price of $1.5 per share;

- India plans to order another 59 helicopters on Kazan Helicopters (KHEL). POSITIVE. New order flows of $300 mn is expected to fall on 2012-2013. Total order could amount to $700 mn. Taking into account that the company is fully loaded for 2010-2011, we believe that delivering of additional 59 helicopters will fall on 2012-2013. Altogether it makes strong support to Kazan Helicopters' shares, which are currently traded with a 50% discount to foreign peers on a basis of 2011E EV/EBITDA of 5.3;

- MHP (MHPC LI) reported benign 2Q10 IFRS financials. POSITIVE. The leading Ukrainian poultry producer, reported its 2Q10 and 1H10 IFRS financials, which appeared to be strong and broadly in line with market expectations.


TRADING ACTIVITY:


More traders come back from their hols and as a result we are starting to have more flows, though most of yesterday's activity came from domestic accounts. I would call yesterday's session more or less predictable as sellers came about once the exchange bell rang - till noon we were sellers of couple of baskets of blue chips from our custody clients on exchange; were working to sell OGKA on MICEX, later on crossed up a good block with foreign account; we had sellers in fertilizers AKRN, URKA; buyers in UFOSP, UFNCP; from the day before we had buying interests in PKBAP, TGKI from foreign accounts - they were filled also in the morning and we turned net sellers there as our internal clients brought more of this stuff to get rid of; yesterday domestic accounts came with bids in regional telecoms - had bids in KUBN, KUBNP, ESMOP, URSIP, though had sellers in ENCOP at the same time; in utilities sector still have buyers in KZBE and TGKG (we were net sellers of the stock for a while), we had a strong buying interest in a basket of utility supply companies; sellers of MRKV; in metals sector had only sellers in NLMK, UNKL; had a buyer in GGOK, were in touch with sellers of VSMZ, VSMO, pipe producers, TRMK; in evening trading hours sellers came with SNGS, SNGSP, TATN - most of it was executed on exchange.

GOOD TRADING TO YOU!
 

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MARKETS vs. ECONOMY: Morning comment - 23.08.2010

Good morning. You'd normally expect to see something like "Markets AND (not VS) Economy" in the header for a morning comment, however my wording is not a typo at all.

If you look at markets alone, things are looking up and the stocks are very attractive. Reasons for that are: 1) Loads of cash sitting on the sidelines waiting to be put into action, 2) as a result, a plethora of M&A deals where the bidder is willing to pay a hefty premium to the target's share price (if British Gas indeed gets snapped up at 16 quid, this will be the mother of such hefty premia), and, 3) most importantly, strong corporate earnings. Currently, 75% of the 484 companies in the S&P 500 that have reported have beaten Wall Street expectations, compared with a quarterly average of 62%, according to Thomson Reuters. I have rarely seen such a wicked bundle of mega positive bits for the markets.

BUT - there is a clear decoupling of markets from economy now. Some clever men are saying there is a 50/50 chance of economy dipping into recession and deflation from this juncture - I will argue we have not YET come out of the recession AND we ARE effectively in a deflationary environment already. I will leave deflation for tomorrow's comment - at the end of the day this is a morning comment for God's sake :), not an article in FT - but I will comment here why we are still DEEPLY in the recession. Answer in fact is very short - job growth, or the lack of it.

In the attachment you will find a little-known (and too bad it is that little-known!) civilian employment-population ratio - in contrast to the better-known unemployment rate, which measures the percentage of working-age Americans who are actively seeking jobs but do not have one, the civilian employment-population ratio measures the percentage of working-age Americans who have a job, whether they are seeking one or not. This distinction matters because the state of an economy affects whether someone looks for a job at all. Bad times discourage potential workers from seeking jobs; boom times encourage marginal workers to seek them. Looking at this ratio, America is suffering its largest drop since World War II. In 2007, a little over 63% of adult Americans had jobs. Recent report shows that only about 58.4% do, a decline of nearly five percentage points. While the unemployment rate remains steady at 9.5%, the employment-population ratio continues to fall each month. In April it was 58.8%, in May 58.7%, and in June 58.5%.

Since America has about 238 million civilian adults of working age, this decrease means that we have nearly 12 million (!!!) fewer jobs today than if the employment-population rate were still at its 2007 level of 63%. No other recession in the past 60 years saw such rapid job destruction in either absolute or percentage terms. In the 1979-82 recession, unemployment topped out at a higher rate, 10.8%, but the employment-population ratio declined by only three percentage points, to 57% from 60%.

And those clever men are saying there is a 50/50 chance of a double-dip recession? We are actually - in many ways - still at the bottom of the recession! Worst thing is that today's leaders will NOT do what was available to Reagan and Maggie in 1982 - I am talking Reagan's tax cuts in 1983 and 1986 tax reform that lowered the top marginal income tax rate to 28%, allowing America to employ the millions of late baby boomers, women and immigrants who sought jobs. That led to the employment-population ratio recovering in less than two years after hitting bottom - the sort of momentum that continued for the rest of the decade (see chart attached).

The result is obvious - companies are more inclined to put loads of money that they have into mergers and acquisitions to grow, with the net result being more job loss than creation. Is there light at the end of the tunnel? Yes, and perhaps an unusual one - health-care reform. Companies are also slow to hire because they are still unclear on how much health-care reform is going to cost per employee. If that is cleared up favourably - it will be a massive burden off hiring shoulder!

And now back to why I am bullish in this grim environment. Health-care reform may help loads, but at the end of the day, it is strong corporate earnings that'll fix the hiring (and spending). And that is the bit we have firmly in place. The only reason why (with this gloomy reality in jobs market) we are not sitting at the bottoms of March 2009 is that the markets tend to run ahead of the economy. And - with this sort of corporate earnings - they have much more way to run!



THINGS TO WATCH THIS WEEK: Last Thursday saw a surprise jump in initial jobless claims to 500,000, with those numbers subject to revision this coming Thursday. Coupled with an anticipated downward revision to the second-quarter GDP, many are wondering if the 500,000 figure was an anomaly or something more troubling. On the earnings front, I want to see how the ex-darling of NASDAQ, JDS Uniphase reports on Wednesday and how Tiffany sees its high-income-bracket customer base spending on Friday.



RUSSIA:

- Blackout in St Petersburg. NEGATIVE for FEES. Electricity supply of several areas of St. Petersburg was disrupted on Friday at about 18:40 Moscow time due to the accident, according to preliminary data, occurred at one of the power substations of Federal Grid Company (FEES). There was no electricity in most parts of the city and region during a few hours. After emergency protection system worked out four TGC-1's (TGKA) thermal power plants were stopped. We believe that before the announcement of official reason it is premature to make any conclusions. However, this fact once again confirms the need to increase investments into power sector. We believe that in short term news may be negative for FGC's (FEES) performance, while in the long term we may expect from the government further steps aimed at improving the situation in the industry, as well as possible staff reshuffles;

- 2009 FRP tenders raise government's concern. NEGATIVE. The FAS will be on the watch. Experts, who supervise pharmaceutical industry, investigated the government FRP tenders held in 2009 and now suspect that the Ministry for Health and Social Development acted in price collusion with the largest pharmacy producers and distributors (among which there are apparently Pharmstandard and Protek). The investigation found that unfair terms set during the tenders led to artificially smaller number of participants and high prices that implies inefficiency of such pricing mechanism in terms of budget savings. We now expect FAS inspectors to implement further investigation. This may be negative for those pharma companies, which may be exposed as unfair participants. We remind that FRP budget in 2009 totaled RUR80 bn (about $2.5 bn) or 16% of the total Russian pharma market. In particular, Pharmstandard sales of anticancer drug Velcade (the company acted as distributor) under the government tender in 2009 totaled $115 mn or about 15% of the company's total sales. We expect more details to follow;

- UTair (TMAT) shows positive operating data in July 2010. POSITIVE.

- Rosneft (ROSN) to develop a gas field in UAE. NEUTRAL. Investing in the UAE gas field Sharjah. Rosneft and Crescent Petroleum (United Arabic Emirates) will invest $630 mn in exploration of a UAE gas field Sharjah. In May this year, Rosneft acquired 49% in this project for an undisclosed amount. The plot's gas reserves are currently estimated at 70 bcm of natural gas and 16 mn tn of condensate. If the exploration is successful, production may be launched in 2013. The gas will be sold domestically and exported. Crescent Petroleum currently has projects in United Arab Emirates, Oman, Yemen, Egypt and Pakistan; and also previously in Canada, Yugoslavia, France, Tunisia and Argentina. Unlike Lukoil, Rosneft has limited exposure overseas (currently, only exploration projects in Kazakhstan and Algeria). Further international expansion and partnership with players from different geographic regions would benefit the company, in our view.



TRADING ACTIVITY:

On Friday we had extremely low trading activity, though most of our flows remained unchanged except for blue chips where tend to have high frequency trades for our arbitrage clients. In utilities we kept on buying TGKs - 6,7,9,11, had a seller in TGK5; some demand came back into distribution sector with bids around MRKHP, MRKK; at the moment we have a 2-way market in size in OGK1; buyer in IRGZ; in metals sector we continue to be sellers of VSMZ, UNKL; have some sellers in infrastructure names.

Good week ahead to you!
 

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Morning comment - 24.08.2010

Good morning! Very brief – as I doubt we will have anything vibrant in the market today with most interesting things to happen later on in the week – see yesterday’s comment {NSN L7LFFK3PWT1C <GO>} for Bloomberg users.



RUSSIA:

- Food retailers’ 2Q10 financials. Looking for new impetus for growth. This morning Magnit has announced 1H10 IFRS financials, which came below both our expectations and market consensus on the margins side. Also today we expect Dixy to publish 1H10 IFRS results, while X5 Retail Group report is due on 26 August. These companies are expected to hold conference-calls with analysts to provide more details of operations and update management guidance. Companies’ 2Q10 trading updates, which came earlier, were generally on the positive side. Just as a reminder, Magnit showed spectacular 3.4% y-o-y jump in 2Q10 discounters LFL traffic growth, which came as a result of investments into prices and has turned 1H10 LFL traffic dynamics to a positive area for the first time since 2008. Dixy demonstrated continuing recovery in sales per sqm, but remained still weaker than expected though has considerably speeded up its store openings, which resulted in 41 stores opened in 1H10 (vs. company guidance to open 100 new stores this year). X5 Retail Group’s discounters remained strong, but with downward LFL traffic growth at 6% y-o-y in 2Q10 despite further price investments; hypermarkets traffic seem to stop dropping at the expense of deep discounts, while supermarkets remained the weakest part of the chain (but we expect the favorable effect on traffic to come in 3Q10 after more aggressive pricing policy has been implemented since June);

- Mechel (MTL US) to expand into Brazil. NEUTRAL. Mechel is negotiating to purchase metals assets from Brazil’s Cosipar. Particularly, Mechel could purchase two blast furnaces in Usipar project and one blast furnace Cosipar’s key plant. Reportedly, the potential buyer is Mechel’s main beneficiary Igor Zyuzin as Mechel is restricted from acquisitions under restructured debt covenants. Neutral for Mechel. We regard this news as neutral for Mechel. Total capacity of Usipar blast furnaces amounts 1 mn tons of pig iron and may increase up to 3 mn tons. By acquiring assets in Brazil, Mechel is likely to achieve synergy effect with North American Bluestone Coal, which it bought in May, 2009. We recommend a BUY on Mechel’s ADR with the target price of $29.5.


TRADING ACTIVITY: [/B]

Our yesterday’s flows were almost unchanged, domestic accounts contributed the bigger part of our trading activity. We kept on buying TGKs – 5,6,7,9,11, 2 times we crossed nice blocks in TGK6 turning from buyer to seller and vice versa; in utilities sector after a long pause our buyer in MRKU came back bidding for blocks, we would also bid for MRKK, MRKHP; in telecoms buyer goes in KUBN, ESMO, RTKMp; yesterday we were also sellers of AKRN, VRPH, IRKT – all crossed between domestic and foreign accounts; we were working to sell GAZP & SBER all day long into the close at careful discretion.

GOOD TRADING TO YOU!


This note has link {NSN L7N92Y3PWT1C <GO>} on Bloomberg
 
Morning comment - 25.08.2010

Good morning and let me be company-specific in this morning comment – I will never bombard you with obvious facts when I don’t feel any new spice in my morning meal :)


RUSSIA:

- 1H10 dividends of Polyus Gold (PLZL) to amount RUR8.52 per share. NEUTRAL. Polyus Gold is to pay interim dividends for 1H10. Polyus Gold 1H10 interim dividends are expected to be RUR8.52 per share. Total dividends should amount to RUR1,624 mn that implies dividend yield at 1%;

- Chelyabinsk Pipe (CHEP) to increase charter capital twice. The price is not set yet. Chelyabinsk Pipe’s shareholders approved at EGM on 20 August, 2010 an increase of charter capital through additional share issue in amount of 472,382,880 ordinary stock. The issue is placed under public subscription. The price will be announced by the board after state registration of the issue and the expiry of pre-emptive rights period. Thus, the company’s capital will double to 944,765,760 shares. Record date for taking part in EGM was on 15 July;

- Alliance Oil (AOIL SS) reports 2Q10 IFRS results – challenging quarter again. NEGATIVE;

- Volga TGK (VTGK) 2009 IFRS net income more than doubled. POSITIVE. Results have improved. Volga TGK (TGK-7) increased its net profit in 2009 by 2.3 times. For 2009 Volga TGK posted net profit of RUR4.47 bn vs. RUR1.9 bn a year earlier. Volga TGK’s revenue grew by 9.5% to RUR52.39 bn. Operating expenses increased by 3% to RUR47.22 bn;

- Shareholder structure may be changed. It should be noted that at the moment FGC owns about 30% of Volga TGK and plans to transfer this stake to InterRAO. IES Holding stake in Volga TGK currently is about 40% and there is reason to believe that IES aims to increase its stake up to a controlling one and will endeavor to continue the consolidation. Уesterday, Kommersant reported that Lamesa Holding SA, which may be affiliated to IES Holding, last month increased its stake in Volga TGK to 6.38% from 3.37%. If IES increases its stake to 50%, it will be obliged to make a buy-out offer to Volga TGK’s minority shareholders. We consider financial results of Volga TGK as positive and believe that despite Volga TGK looks pricey based on genco’s key parameter EV/kW of $ 360/kW (average for TGK is $ 240/kW), quotes of the company is likely to continue growing;

- Magnit (MGNT LI) 1H10 IFRS results: margins suffered, but do not be upset! See note attached.

- FAS allowed SUEK consolidate 100% of voting shares Kuzbassenergo (KZBE) and Yenisei TGK-13 (TGKM). POSITIVE.


TRADING ACTIVITY:

Yesterday we had much activity: more buyers came with bids for regional telecoms, we crossed a good block in RTKMp, ESMO, we would still bid for the rest of them; in utilities sector – we are buyers in MRKU / still sellers in MRKV and MSRS; we were sellers of SBER & GAZP all day long and into the closing, though we had also a big buyer in VTBR; at the end of the day we had buyers in SILV and more bids came for telecoms.

Good trading to you!

Bllomberg link for this note is {NSN L7P5113PWT1C <GO>}
 

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MARKETS vs. ECONOMY - PART II

I commented on Monday (see my post of 23 August, also Bloomberg post {NSN L7LFFK3PWT1C <GO>}) that we are actually - in many ways - still at the bottom of the recession, and it is the corporate earnings, and the markets tendency to run ahead of the economy, that warrants our bullish view. But “recession” is not the worst scarecrow in today’s environment – far from it – what many view as the real devil is “deflation”, supposedly looming over the developed countries’ economies. Why? Mostly because most people including those occupying seats in the Congress and the Parliament on the two sides of the pond do not really know how to deal with deflation!

It is a bit late for them to cry over spilt milk, because – from what I am seeing – we ARE ALREADY in a deflationary environment. Why do I see deflation in developed countries as being here and now? Deflation is not just prices for a hot cross-bun or a plate of Jamaican soul food that you get yourself at the Notting Hill Festival :); it also involves prices for assets. Home prices down 35% add to that stocks prices, for many, down the same amount; commercial real estate in many markets down more than 40%; 40% of worldwide auto making capacity unused, and so on – surely you get the broad picture.

Let us get to the bacon now. Since spring highs S&P and FTSE lost how much? Roughly 10%. I can give numerous accounts of such sell-offs over the past decade, in the course of which property (and that is the mother of all indicators, that is your home) would be clocking up new highs, meaning all BUT one thing - inflation. What is happening now? Courtesy of Trovit – see link below:

http://homes.trovit.co.uk/162703/london-price-property

in the last 3 months (May 2010 - August 2010) the average for sale price for property in London has decrease of 8.45 %. And that is not deflation? And that happening when the world’s second-largest maker and distributor of building materials, CRH Plc, tumbles 16% the biggest drop since 2002, after forecasting lower earnings, meaning in plain English fewer homes? Fewer homes at cheaper prices – and that is not deflation, me Ladies and Lords? :)

You may say – hold on – in the same 3 months the average for RENT price for property in London has increase of 26.63 % - see following link:

http://homes.trovit.co.uk/162703/london-price-rent-property

Isn’t that inflationary? Generally yes, but do not forget that the value of a brick-and-mortar asset and the value of leasing that asset have very different implications for inflation/deflation waterline. 3 reasons come immediately to mind:

1. Take my home in Fulham. 8.45% of my home value goes down the loo in just 3 months, and – if I am slick enough to kick out my tenants and get other ones at a 26.63% mark-up to the rent they are paying me – you don’t need to be a bloody Einstein to figure out I am still 30 grand in the red;

2. Value of leasing assets has the flipside. The trademark for deflation is pretty much “sitting on your money tight”. Now imagine a “buy-to-let” buyer. Him sitting tight on his dough in May and doing his do now is actually DOUBLING-UP on his profit due to lower house value now and higher price he will be charging his lodgers.

3. People are more than willing to pay premium for rentals anticipating the property to deflate even more.

My point is that deflation is not a fear, it is a reality. Now let us look round. – What can possibly stave it off? And that will have to be EMs where you can still get double-digit returns just depositing your money, at least in countries like Russia and Brasil. I hate repeating another man’s words, but I will totally second Mark Mobius at Templeton here. EMs have all the capacity to help out developed nations not just on the front of liquidity, but more importantly, on the account of that delusive inflation that we all so hate but which is the only alternative to the deflation that will be yours, mine and broad market’s Boogey Man.
 
Morning comment - 30.08.2010

Good morning! Friday price action can be summarized very briefly indeed - "It could have been worse, and because it wasn't, that was good news": I am not just talking about Bernarke's accession of economic recovery as "tentative", but also about Intel Corp. lowering its revenue estimate. There, too, the news wasn't as bad as it could have been. Same with GDP which was reported to have grown at a 1.6 percent rate in the April-to-June period - way down from its earlier estimate of 2.4 percent but not as bad as the 1.4 percent expected by many.

The motto for this market is quite clear - the bar is being lowered for what constitutes good news these days - in broad economy and macro departments. We mentioned in our comment from 23 August (Bloomberg link {NSN L7LFFK3PWT1C <GO>}) that in many ways - we are still DEEP in the recession, and that bar being lowered that much is its clear trademark.

In micro department however, the situation is DRASTICALLY different - companies are generally coming with very strong earnings, they sit on loads of cash and boldly go using that cash for M&A activity. The general market always tends to run ahead of macro economy getting out of recessions - and that is exactly what we are witnessing now - nervous, jittery run-ahead. Little cherry on top :), one additional reason to look north rather than south is that bullish sentiment on equities fell to a 18-months low (the last time it was seen in March 2009), that extra pessimism is that exact acorn from where biggest oaks grow! :)


TRADING ACTIVITY:

On Friday most of our trading flows were in telecoms sector - we were sellers in URSIp, SPTLp, URSI till noon when all the supply was bought up by domestic accounts; also in the first half of the day we had a big buyer (domestic account) in RTKMp whom we managed to fill taking liquidity from MICEX as no sellers were found. The stock rallied by 12,5% on Friday triggered by the news that an amendment to the company's by-law according to which shareholders of preferred stock will have a chance to get 10% of net profit in the form of dividends had been introduced again. This amendment should be approved during EGM and the company's register for this EGM will be closed only after all the minorities who voted against reorganization will be bought out (September, 11 is the last day). We also traded utilities, though activity there for the last several days had decreased dramatically: small trades in LSNG were accompanied with crosses in OGKA (still left seller there); had buyers in AFLT - almost no supply is seen; in the last 30 minutes before the closing bell we had buyers in blue chips, especially in GAZP where domestic accounts tend to increase exposure ahead of IFRS earnings release for the 2Q.

Good trading to you!
 
Morning comment - 31.08.2010

Good morning! There is a clear dichotomy that I’d like to mention here. Let us take Russia e.g. Back in 2008 Renaissance Capital and Siguler Guff & Co brought $600 and $626 mil respectively of investments into non-publicly traded companies. This day and age, UFG Asset Management brings $225 mil into the same non-public sector, and they are the shining star for such investments. Interesting numbers, aren’t they? – Especially taking into account the fact that this is a non-deflationary EM :)

On the other hand, go back to essentially deflationary environment of G7, and you will have a plethora of M&A activity:

- Intel announced plans to acquire the wireless unit Infineon Technologies for $1.4 billion in cash;

- Sanofi-Aventis offered $18.5 billion in cash to acquire Genzyme. Genzyme immediately rejected the offer as inadequate;

- The bidding battle between Hewlett and Dell for 3Par took turn over the weekend as 3Par deemed HP's bid of $30 per share superior to the offer of $27 per share that it had already accepted from Dell;

- Dow component 3M will pay $430 million, or $10.50 for each share of Cogent

And THAT does not seem to inspire buyers in G7.

We are witnessing a juncture in the markets that has not seen before. Clear dichotomy. Many would say things are just going haywire. But there is one thing that will eventually win and show markets direction. CORPORATE EARNINGS. Nomura research suggests that so far earnings have surprised enormously. In revenue terms it reports the highest level of revenue surprises in history. Some 48% of companies has surprised while just 15% have disappointed. More to that - those companies that beat consensus by more than 5% have outperformed those that missed consensus by more than 5% by an average of 3% on the day of the announcement and by 4.5% over the week following the announcement!



RUSSIA:

- Severstal (SVST LI) to finish HDGL reconstruction this October. POSITIVE. Severstal is likely to finish hot-dip galvanized line (HDGL) reconstruction on Cherepovets in October, 2010. Capital expenditures into this project are estimated at around RUR2 bn ($65 mn). As a result, Cherepovets mill’s galvanized sheet capacity would increase two-fold to 400,000 tons per year. Coated sheet capacities are on the rise. Also Cherepovets mill has started the installation of equipment of the polymer coating line #2 with 200,000 tons capacities. Thus, Cherepovets mill’s coated sheet capacities should double in December, 2011. We confirm our BUY recommendation on the stock. We regard this news as positive for Severstal performance. Galvanized and coated sheets are value added products. Thus, increase in their production should have a positive impact on the company’s profitability. We maintain our positive view on Severstal and recommend BUY the stock with the target price of $15.5 per common share and GDR.

- Power Machines (SILM) released 1H10 IFRS results: margins improved. POSITIVE. The company’s IFRS results showed the same tendencies as in previously posted RAS financials. The biggest Russian power equipment producer’s sales stayed practically flat – down by 1% y-o-y to $711 mn. At the same time, the company’s EBITDA advanced 60% y-o-y to $147 mn, which provided EBITDA margin of 20.7% vs. 12.8% for 1H09. Due to the lower impact in 1H10 from loss making contracts signed in 2004-2005 Power Machines’ net income advanced 84% y-o-y to $98 mn, net margin increased to 13.8% vs. 7.4% in 1H09. We believe the company’s IRFS results reflect trends evidenced in previously published RAS financials and consider the power equipment producer’s efficiency to keep improving. Attractive multiples and buyout offer. Power Machines’ 2011E EV/EBITDA equals 4.8 vs. 8.5 on average for foreign peers (according to Bloomberg consensus), which implies a discount of 44%. We remind that on 12 August Highstat Limited owned by Alexey Mordashov announced a buyout offer to Power Machines’ minorities of 2.61 bn shares, which equals 29.94% of the company’s charter capital. As of June 30, 2010 Highstat Limited owned 70.06% in Power Machines, Siemens – 25.00%. A buyout price was set at RUR6.9948 per share (or $0.23/share) that is 2% below the company’s current market quotes. Mordashov’s offer is in force till mid-October.

- FAS allowed InterRAO (IRAO) to take control over TGK-7 (VTGK). POSITIVE. Federal Antimonopoly Service (FAS) allowed Inter RAO UES (IRAO) to take control over more than 25% of Volga TGK (VTGK) setting a number of conditions, including the sale of generation stations. Inter RAO plans to get a stake, which is on the balance of FGC (more than 30%). According to the FAS decision, the company within one year after taking control of TGK-7 will need either to sell power facilities with total capacity of 2,513 MW or to adhere to behavioral conditions on the wholesale electricity market, reporting on the pricing of electricity produced, since in this region there are other generation facilities, affiliated with Inter RAO that will increase the market power of the company. At the moment, Inter RAO is ready to comply with FAS regarding behavioral conditions, so there is no need to sell generation assets. We view the news as positive for Volga TGK performance since already at least three potential investors are willing to own the company. As a reminder, recently it was reported that IES Holding’s stake in Volga TGC may be close to the controlling one. Inter RAO’s stake is likely to reach 30% soon. Gazprom repeatedly stated its desire receive a stake in the genco. Therefore, in our opinion, sooner or later there will be either a sell or an asset swap, followed by obligatory buy-out offers from new owners, which may be positive for the Volga TGK minority shareholders. Volga TGK was not included in the consolidation scheme of IES Holding’s generation assets. Therefore, in our opinion, the intrigue surrounding the shares of Volga TGC remains that could revive the rally in the stock.



TRADING ACTIVITY:

Yesterday we had an ordinary day in terms of flows & trades partially due to banking holidays in London: traded blue chips only GAZP & SBER – GAZP was in demand ahead of 2Q earnings release; many trades in our beloved telecoms sector – all regional operators we well bided across the board – buyers go on increasing exposure to the sector; RTKM & RTKMp rallied by ~10% (for RTKMp it was the 2nd day in a raw after rallying by 12% on Friday) playing out dividend story that is supposed to be clarified very soon, we also think that some crazy guys had been staying short in Rostelecom...we have seen it many times… at the end of the day we turned seller in RTKMp – the stock looks overvalued at these levels; in utilities we had trades only in a basket of supply companies where we continue to bid; started to see more sellers in TGKs and OGKs – think that most of these companies might continue to loose ground a bit in the nearest future due to their strong performance during summer time and the fact that strategic investors who had been increasing their stakes have already been fed up; at the same time we continue to be buyers in MRKU / sellers in MRKV; we had high trading activity in AVAZ & SVAV; were sellers in AKRN.

GOOD TRADING TO YOU!
 

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Morning comment - 02.09.2010

Good morning!

Very brief today - and do not forget it is a bull talking here :) It is very tempting for shorts to call yesterday's ferocious price action "a short squeeze". However, the market is clearly trying to "bubble up" again well ahead of the economy, especially jobs situation. And it is fuelled by 2 simple things: 1) very good corporate earnings; and 2) EMs which start giving a much more important feedback to developed markets.

It was a bullish sign that more than 98% of the names in the S&P 500 staged gains. But despite such strength, the S&P 500 could not push past its 50-day moving average, which is in the 1080 zone. Crucial bit at this juncture is the official nonfarm payrolls report on Friday. That report will likely play a pivotal part in this week's remaining sessions, given that it offers insight into the "health" of U.S. companies and carries implications for the broader economy. Concerns about the pace and sustainability of the economic recovery have led to cautious trade in recent sessions. Participants are showing a willingness to hold riskier issues.
CORPORATE NEWS:
GAZPROM’s, EVRAZ’s, VTB’s FINANCIALS ARE IN THE WIRE AHEAD OF MARKET OPENING


* Tomorrow, on the 3rd of September, Dixy (DIXY) to disclose 2Q10 and 1H10 IFRS financials. NEUTRAL. We forecast Dixy’s gross margin to decline to 25.8% in 2Q10 vs. 26% in 1Q10 with SG&A expenses to change slightly at 23.5% of total sales. Thus, operating and EBITDA margins are expected at 2.3% and 4.7%, respectively, being still far below the levels of Magnit and X5 Retail Group. We also expect Dixy’s foreign currency debt revaluation to have a negative impact of about $9 mn on net income. The current growth pace is somewhat below that necessary to achieve the company’s ruble-based sales growth target at 20% y-o-y this year that, however, may be overtaken in 2H10. We consider the discount (about 30%) in relative valuation vs. Magnit and X5 Retail Group (based on 2010E EV/EBITDA) is justified by weaker growth of Dixy’s fundamentals and its lower operating efficiency.

* AVTOVAZ (AVAZ) car sales slumped by 13% m-o-m in August. NEUTRAL. Rest of the year expected to be strong. AVTOVAZ plans to produce more than 60,000 cars per month on average over September–December to achieve its target of 571,000 vehicles for full 2010, which could lead to a 94% y-o-y increase. The car maker has already reported net income of $65 mn for 2Q10 under RAS – the first company’s quarterly net income since 3Q08. We note that abnormally hot weather in Russia, particularly in Samara region, forced the company to halt production in 2–8 August and brought losses of $16 mn.

* Rostvertol (RTVL) expects net income to double to $30 mn in 2010. NEUTRAL. The company’s management made ambitious guidance… Yesterday Rostvertol’s announced several goals for which are expected to be achieved this year. In particular, the producer of combat helicopters aims to boost its revenue by 90% y-o-y to $500 mn in 2010, while net income is targeted at $30 mn (y-o-y jump by 2 times). It means that Rostvertol’s net margin this year could advance to 6.7% from 5.8% in 2009. We consider that it would be hard to achieve due to the company’s net debt almost doubled q-o-q to $157 mn in 2Q10 that may lead to sharp growth of interest expenses and as a consequence negative impact on producer’s margin. …We believe that this news is already priced in.

* TGC-1 (TGKA) posted 1H10 IFRS financials. NEUTRAL. 1H10 IFRS revenue increased by 28% y-o-y to RUR27.203 bn, including the electricity sale – up by 46.2%, to RUR10.058 bn, capacity sales – up by 13.2% to RUR3.657 bn, heat – up by 24.3% to RUR13.2 bn. Positive dynamic of revenue is attributable to the increase in useful output of electricity and heat, higher share of free market from 1 January, 2010 and growth of prices in the wholesale electricity market. EBITDA added 17.4% y-o-y to RUR5.58 bn, EBITDA margin lost 1.8 ppt to 20.5%. The company’s profit before tax increased by 10.6% to RUR3.46 bn. Net profit reached RUR2.8 bn, up by by14% y-o-y. We view TGC-1’s results neutrally and believe that the company is among generators which will gain more benefits from the liberalization of the wholesale market in Russia due to the structure of their generating capacities and location.


TRADING ACTIVITY:

Yesterday we had a more active day being buyers in blue chips for the most part of the day, clients' activity slowed down in the 2nd half of the session, though we kept working orders in SBER, VTBR, OGZD, GMKN till the closing bell. Rostelecom RTKM/p shares retreated a bit after sharp rally in previous days and we were sellers since the very opening; we were also sellers of NVTK in the morning hours; we continue to buy SVAV and TGKF, URKA and regional telecoms at careful discretion (started to have natural sellers there - all domestic accounts).

Good trading to you!
 

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