Morning comment - 10.09.2010
Good morning! A couple of observations:
Looking for a success story? Check ARM Holding since 2007 (chart attached). As a guy who traded the stock on a daily basis back in 2000-02 (stop giggling
), I tend to keep a close eye on it – and for one main reason. We mentioned in our comment from 25 August (see Bloomberg link {NSN L7PD743PWT1C <GO>}) that developed nations are essentially already deep in a deflationary environment.
Possibly the easiest and quickest way OUT of deflation is a revolutionary change of “consumer’s base basket”. This is happening and happening rapidly, and it is chip and gadget makers that are at the forefront of such change. No wonder ARM, the UK designer of semiconductors used in Apple’s iPhone – and Apple products are spearheading that revolution in consumer’s basket – flies to the sky after unveiling a new Cortex-A15 MPCore Processor. This new product is a potential game changer offering five times the performance of existing smartphone processors. Add to that winning an order from Samsung. for a GPU socket in their latest application processor chip – and you cannot but get to the conclusion that
it is companies capable of rapidly changing the consumer’s basket that are the success stories of today.
Interestingly enough, HMV on the other hand, is another clear example of this ongoing revolution in consumer’s basket. Their music and DVD sales at outlets open at least a year in the UK and Ireland fell 15 percent in the 19 weeks ended Sept. 4. Why buying a DVD when you can listen to your fave track on your Apple’s iPhone with an ARM chip in it?
THING TO NOTE IN RETAIL SECTOR: We comment on X5 developments below – and to be frank the alternative of Wal-Mart stepping in to snap up Kopeika seems a pure craze to many. However they successfully played this sort of game in Mexico, creating 2nd largest Mexican company by cap - WALMART DE MEXICO (WALMEXV MM). Another success story by the way
I would not be entirely snubbing this possibility!
CORPORATE NEWS:
(for details see our Daily note at
http://www.tkbc.ru/eng/research/research/stock_analysis/ or in Bloomberg at {TKBC <GO>})
1. The Russian government may extend cash-for-clunkers program until 2012. POSITIVE
* State reserved RUR13.5 bn for srappage certificates in 2011 federal budget. According to Vedomosti, the Russian government plans to allocate RUR13.5 bn for the cash-for-clunkers program in 2011 federal budget. We remind that the state launched RUR10 bn cash-for-clunkers program on 8 March 2010 to support domestic car makers. We believe that this program is one of the most successful initiatives of the Russian government. Thus, the first part of 200,000 scrappage certificates was fully used by the end of June vs. autumn as it was expected.
* Supportive for AVTOVAZ and IzhAuto. AVTOVAZ is a key beneficiary of cash-for-clunkers program (above 80% of scrappage certificates provided for LADAs). It will also be positive for IzhAuto, which in September launched the assembly of Classica models (LADA 2105/2107) to realize AVTOVAZ strategy to cancel Classica production next year and commission new Lada Granta by the end of 2011.
2. FAS allowed X5 Retail Group’s (FIVE LI) to acquire Kopeyka. POSITIVE
* FAS gave the green light to acquire Kopeyka, except of some stores. We remind that according to the independent appraiser’s estimate, Kopeyka’s business value is more than RUR34 bn (about $1.1 bn) or about 12 in terms of 2009 EV/EBITDA (X5 Retail Group trades at 15.7 2009 EV/EBITDA).
3. Gazprom’s (GAZP) board approves changes to 2010 investment program. NEUTRAL
* Investment program is increased by 13%, neutral. The investment program was increased by 13% from the level approved in November 2009 to RUR 905.3 bn (around $30 bn). In production segment, Gazprom’s priority for 2010 is development of Bovanenkovo and Shtokman fields, in transportation – construction of pipelines under East gas program (Sakhalin-Khabarovsk, etc.), as well as Nord Stream and South Stream. According to Vedomosti, Gazprom forecasts non-CIS exports at 140-145 bcm, unchanged from the 2009 level, – this is in line with Gazprom’s previous guidance at 1Q10 results conference call. The recovery in gas production this year (in January-August, Gazprom’s gas output increased by 16% y-o-y) and favorable domestic gas prices (regulated gas tariff for industrial consumers set at $76/mcm for 2010) should support the company’s financials this year.
4. Veropharm’s (VRPH RU) 2Q10 and1H10 IFRS results: margins soared well above the expectations! POSITIVE
* Positive surprise in margins at all-time highs. Yesterday Veropharm reported its unaudited 1H10 IFRS results, which came well above our and market consensus estimates in terms of margins. The company’s 2Q10 revenue increased by 23% y-o-y in ruble terms (vs. only 5% y-o-y growth in 1Q10, when the company acknowledged the underproduction of several categories of drugs due to the lack of ingredients as a result of ingredients suppliers’ problems). Thus, 1H10 sales growth totaled 16% y-o-y, which is above the overall market growth of 4%). Veropharm’s 2Q10 gross margin soared to 73.6% (vs. our conservative forecast of 70%) on considerable margins expansion in all segments and further increase in share of high-margin prescription drugs sales (amounted 75% of total sales in 2Q10 at the expense of decreased share of lower-margin traditional drugs and adhesive bandages sales). Thus, Veropharm gross margin peaked to 73.3% in 1H10, hitting all-time high. 2Q10 SG&A expenses returned back to normal level and totaled 33.5% of sales after they shot up to 55% in 1Q10. 2Q10 EBITDA margin jumped to 42% that helped 1H10 EBITDA margin to improve to 34.3% (vs. 33% in 1H09). Veropharm’s net margin increased to 27.3% in 1H10 that demonstrates 34% y-o-y growth in the company’s EPS (in dollar terms).
* We maintain our BUY recommendation for the stock with end-2010 target price at $47 per share, which implies more than 25% of upside potential. Veropharm relative valuation in comparison with its EM peers implies almost a 40% discount on the basis of 2010E EV/EBITDA.
5. Gazprom’ s entity filed a lawsuit against the offshore of IES Holding. NEUTRAL
* Lawsuit as a tool. Structure of Gazprom (GAZP) sued at law on RUR16.877 bn to affiliated with the IES Holding Offshore Berezville Investment Ltd, which owns a 11.29% stake in Volga TGK-7 (VTGK), Interfax reported. The reason for filing a claim is not specified. According to the source of Interfax, Gazprom may claim a part of the stake in TGK-7, which IES Holding acquired from RAO UES at the time of restructuring. Currently, IES, according to unofficial sources, owns about 48 -50% of the generation company, and Gazprom has a minority interest. A source familiar with the negotiations between Gazprom and IES on TGK-7, told Interfax that the parties agreed on their positions when filing a claim.
* There are two possible beneficiaries. Earlier, Gazprom has repeatedly stated that the company may be of interest of controlling TGK-7. IES is ready to keep its stake in the generation company, while until now it has not planned to include it in the consolidation scheme of generation assets. In addition to the structures of Gazprom's, Inter RAO UES expressed its interest to TGC-7 and is likely pasta receive a 30% stake in the generation company, which is on the balance of FGC.
* Waiting for changes. We believe that the news is neutral for TGK-7’s stock performance, and in our view, in the medium term we may expect changes in TGK-7 shareholder structure. However, it is premature to make any conclusions about the prospects of such events for minority shareholders, in our view, because the changes may be as a consequence of a sale or an assets swap between the parties, not involving cash participation.
TRADING ACTIVITY:
We churned a good chunk in PIK Group yesterday, enough to say we digested daily MICEX volume in the paper. We traded quarter bil of URSI, Western accounts were hunting for TNK-BP, we traded almost a mil shares, BID OVER in 3 mil shares for today. Also, moving up the tier ladder
, we worked Western bids in Gazprom, RosNeft and SpermBank Prefs – as UK brokers call it
Good end to trading week to you!