East Capital awards prize in hard times

By bne IntelliNews November 16, 2009

Ben Aris in Stockholm -

Normally, funds would avoid holding their annual dinner for investors on a Friday 13th. But given that everyone had more than their share of bad luck this year, East Capital's decision to go ahead with its party in Stockholm this November on such an ill-starred day was probably appropriate.

More fun than last year's party, but less fun than the year before, the event caught the mood in the markets well - a disaster has been avoided and there is real money to be made again, just not as much as before.

And the 200-odd investors really did have something to celebrate as East Capital's founder and chairman Peter Hakansson handed out the Swedish-based fund's annual awards to the winners of best growth, best IPO and best discovery of the year. "This year was a special one for us. Not because of the crisis, but also because it celebrates the 20th anniversary of the fall of the Berlin Wall on November 9," Hakansson told the revellers. "It was an event that created the opportunities that made East Capital possible."

By coincidence East Capital was also first officially registered on November 9, 1997 and the company happened to IPO its listed arm, East Capital Explorer, on the Swedish bourse on November 9, 2007. Numerology anyone?

These awards are always interesting, as they provide concrete examples of the general progress towards transition. This year was doubly interesting if only to show that even in midst of what was one of the worst years on record, companies continue to put the pieces in place and some people are making good profits in the real sector of the economy. East Capital's economist Marcus Svedberg summed it up nicely: "We used to talk about the first, second and third world. The third world is still there, but the second has gone as it has joined the first."

Best Growth

The winner of the best growth award is everyone's favourite Russian company at the moment, the regional supermarket operator Magnit. Moscow's investors discovered Magnit a several years ago, but only after it burst onto the scene as a fully fledged business. The Moscow-centric investment banking business failed to notice the supermarket chain founded in Krasnoyarsk, which avoided the capital and St Petersburg as the main plank of its strategy, expanding in all the other Russian cities instead. Even today when the company is worth billions of dollars, none of the company's top management have moved to the glitz and glammer of Moscow, preferring to remain in the regions.

In the blackest days of the current crisis, analysts were forced to issue 2009 strategies and Magnit's name was one that came up in almost all the reports (bne also tipped it as a name to watch in its Outlook 2009 report issued that month).

East Capital was also interested in the company and had a small stake in it going into the crisis, "but the problem was that everyone else was interested in the company too, so the valuations were very high," says Jacob Grapengiesser.

The crashing markets changed all that and while most other investors headed for the exit, East Capital, with its philosophy of a long-term commitment to the market, took the opportunity to build up a much bigger stake. "The company had debt, but it was all ruble debt, so the devaluation that followed [in the early months of this year] was a benefit. That was followed by a 33% revenue growth over the first half of the year and a 95% growth Ebitda," says Grapengiesser.

With less money in their pockets, Russians traded down from expensive imported food products to the cheaper Russian made goods that Magnit sells en masse, making Magnit one of the few companies in Russia to maintain not only its headlong growth but to keep its expansion plans in tact. "We are an ugly duckling story," says Oleg Goncharnov, deputy CEO. "We went from a wholesale operation in a small regional town 15 years ago, to one of the fastest growing retail operations, not only in Russia, but the whole world."

And the company has a very impressive reputation indeed. The company will have just over 3000 stories by the end of this year (including 22 hypermarkets) in every town with a population of 5000 people or more, making it the only chain in the country that covers the whole of Russia's 11 timezones. And yet the company is only just starting to hit its stride. "Today the Russian retail sector has a turnover of $200bn a year. We are the second largest player but we only have a 3% market share. There is an enormous potential and Russia is one of the most dynamically developing retail markets in the world."

Best IPO

The winner of the best IPO was Polish coal miner LW Bogdanka, which listed on the Polish exchange in June this year. East Capital was hard put to find any candidates for this category at all after capital markets around the world shuttered their shops due to the crisis, but even in normal times Bogdanka would have been a good choice.

The Polish coal-mining sector is not an obvious place to make money, plagued, as it is, by strikes, debt and accidents. However, the state-controlled Bogdanka has been a model of reform and remains both the most efficient and profitable company in the sector by far.

Coal is seeing something of a revival these days as governments across the Continent worry about energy security, and the sooty fuel with a dirty reputation is the main source of power in Poland, used by industrial companies and power stations. But as Euroland expects demand for power to increase by 21% by 2030, governments have little choice but to tap whatever sources of energy they have to hand. Bogdanka produces 5.3m tonnes of the stuff a year and has more than 254m tones of reserves. It is hoping to open a new field in 2011 that will double its production.

The company uses the latest technology and runs a slick operation that can be clearly seen in its financials. Revenues over the first nine months of this year were $294m, up 10% on year, while net profits were $60m, up a whopping 39% over the same period - and this in a year when economic activity in Poland was almost flat. And the company expects to continue in the same vein (pardon the pun)to the end of the year, with revenues climbing to finish the year at $395m and profits $61.6m, which is up 26.6% on year.

Best Discovery

The winner of best discovery was the Lithuanian company City Service, a property management company based in Vilnius. The company has been growing fast and moved into the neighbouring Baltic, Russian and Ukrainian markets two years ago following its IPO on the domestic exchange.

Property management is not the most exciting business in the world, but the success of City Service is an excellent example of how the region is approaching normalcy.

Founded in 1995, the company has moved from its original business of installing water and power meters to managing 18m square meters of government, commercial and residential space, and expects to almost double that amount again in the next six years.

But the success of the company was really founded on the Lithuanian government's reforms that allowed building maintenance to be contracted out to private companies in 2001, creating a new market with the stroke of the legislator's pen. Russia has just introduced the same reform and City Services has quickly moved into St Petersburg where it now commands a 7% market share. Ukraine has promised to make the same reform, but thanks to the political chaos there nobody is holding their breath. "We already have 17% of the Lithuanian market and want to take this to 25% in the future. We also now work in six countries of the region and want to move to others cities in places like Russia," says Zilvinas Lapinskas, the company's general manager.

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