Russia raises $0.8bn in first privatisation deal in three years

Russia raises $0.8bn in first privatisation deal in three years
Alrosa sale takes off as vanguard of privatisation drive.
By bne IntelliNews July 11, 2016

The Russian government raised RUB52bn ($0.8bn) from the sale of 10.9% in state-controlled diamond major Alrosa, Deputy Prime Minister Igor Shuvalov said on July 11.

The secondary offering of the largest uncut diamond miner in the world four days earlier marks a successful maiden placement of the government's renewed privatisation effort, in which state stakes in key companies will be sold to ease the current fiscal squeeze, raising some $15bn to shore up the state budget.

The sale will also calm concerns in Russia that Brexit volatility after the recent UK referendum on leaving the European Union can undermine the privatisation programme. Next in line for partial sale are Russia's largest oil company Rosneft, oil major Bashneft, and state maritime shipping company Sovcomflot.

Commenting on the Alrosa placement, Minister of Economic Development Alexei Ulyukayev noted that the sale was the first successful privatisation deal in three years, and that the raised funds will be channelled to the budget to cover general spending.

The price of the Alrosa placement per share at the Moscow Exchange was RUB67, making an estimated 3-5% discount to the market price before the deal. Russian investors reportedly made up a third of the buyers, with two thirds being foreign investors despite ongoing sanctions against Russia.

The Russian Direct Investment Fund attracted anchor investors such as Middle Eastern sovereign wealth funds and investors from Europe and Asia, Shuvalov said, while noting that American investors largely stayed clear of the deal.

Regarding the Rosneft privatisation, this is not likely to take place on the stock exchange, Shuvalov said, suggesting instead that offering the stake directly to strategic investors will yield greater returns.

On June 19, Bloomberg quoted unnamed sources as saying the Russian authorities are considering the sale of 19.5% in Rosneft to companies from China and India. Investors in both previously expressed interest in Rosneft shares, but none of the parties specified whether they were considering a joint transaction.

The Kremlin and government are also considering reducing state stakes in Russian Railways, Aeroflot and state-controlled lender VTB, with the sale of the assets aimed to raise an additional RUB1 trillion ($15.5bn) to plug gaps in the federal spending programme for 2016.

However, the Russian government no longer plans to sell a 10.9% stake in VTB this year, Shuvalov said. "We thought that the deal is possible in 2016, then we held some consultations and decided that it was not the best time. We will not be offering VTB shares this year," the official said without elaborating. There are "enough sales" planned for this year and "Something should be left for the next year", he added.

Sources close to the Alrosa deal told Bloomberg that Oppenheimer Funds Inc., the asset management unit of Lazard Ltd. was among about 100 buyers of shares in Alrosa. The news agency also named Mubadala Development Co, Abu Dhabi Investment Authority and Charlemagne Capital Ltd. as taking part in the offering.

Kommersant daily reported earlier that the book for the SPO, organised by the investment arms of Russia's two largest state-controlled banks Sberbank CIB and VTB Capital, was oversubscribed by two times.

Meanwhile, Reuters cited unnamed banking sources as saying the two investment banks pocketed a fee of RUB52.2bn, or 1.8% of the volume of the deal, which was close to the maximum remuneration set by the government at 2%.

Organisers were said to have amply earned their cut. "The placement was quick and successful," the CEO of the Moscow Exchange Alexander Afanasiev told the press on July 11, adding that the SPO proves that a quality company can have a successful placement at any time.

BCS equity estimated that the discount for the placement was only 5% and expects ratings on Alrosa's shares to be revised in the nearest future, on more scarce supply and the share in the MSCI index increasing to 2%.

Alfa Bank sees the news of the placement as positive, arguing that Alrosa shares have recently underperformed due to the approach of the SPO, and deeming the paper undervalued in fundamental terms.

"On our numbers, the company is trading at some 3.6x EV/Ebitda 2016 and generating a FCF yield of 25%," Alfa estimates, adding that a significant increase of liquidity is expected after the sale of the stake.

The resulting increase in the MSCI index weight could attract additional $100mn of inflow into the shares, the bank believes. Alfa also expects Alrosa to continue to destock in the second quarter, generating a strong Ebitda and cash flow, with a free cash flow yield of 20% for the first half of 2016.

Moody's Investors Service previously said that Alrosa's Ba1 corporate family rating (negative outlook) won't be affected by the privatisation.

Alrosa "remains strategically important for Russia's government, which will likely continue to shape the company's strategy and appoint its supervisory board members and senior management", Moody's said.

"The negative outlook on Alrosa's rating is in line with the negative outlook on Russia's sovereign rating," Moody's said. "If the sovereign rating were to be downgraded, that could lead to a lowering of Russia's foreign-currency bond country ceiling, which would prompt a downgrade of Alrosa's rating."

  2014 2015 2016E 2017E
Financials, $ mln        
Revenues 5,358 3,667 3,639 4,057
EBITDA 2,528 2,063 2,064 1,993 1,814 2,137
EBITDA margin 47% 54% 50% 53%
Net income -464 501 965 1,285
EPS (adj), $ 0.2 0.18 0.15 0.18
Div/share, $ 0.03 0.02 0.05 0.06
Valuation, Gearing and Yield        
EV/EBITDA 4.2 5.5 5.8 4.4
P/E 5 6 7.5 6.1
P/CF 3.8 6.6 6.4 3.9
Net debt/EBITDA 1.2 1.4 1.3 0.5
Dividend yield 2.90% 2.20% 4.20% 5.50%
Revenues 1% -32% -1% 11%
EBITDA 12% -21% -9% 18%
EPS (adj) 26% -7% -21% 23%
Main Shareholders      
Russian Federal Property Management Agency 43.90%      
Republic of Sakha 25.00%      
Municipal districts of Republic of Sakha 8.00%      
Free float 23.10%      


ALROSA 1Q16 operating results
  1Q15 2Q15 3Q15 4Q15 1Q16 Q-o-Q y-o
Total diamond production, '000 cts 8,385 9,629 11,634 8,612 8,189 -5% -2%
Aikhal 2,596 2,676 3,849 3,201 2,686 -16% 3%
Mirny 1,941 1,922 1,509 1,536 1,808 18% -7%
Udachny 1,349 1,454 362 1,132 1,090 -4% -19%
Nyurba 2,048 1,152 2,064 2,245 2,160 -4% 5%
Severalmaz 450 488 514 498 445 -11% -1%
Almazy Anabara and Nizhne-Lenskoye Ð 1,937 3,336 Ð Ð Ð Ð
Total diamond sales, mln cts 9 9 4.9 7.1 12.1 70% 34%
Gem-quality 7 5.6 3 4.1 8.9 117% 27%
Non-gem quality 2 3.4 1.9 3 3.2 7% 60%
Average diamond selling price, $/ct 127 114 115 100 109 9% -14%
Gem-quality 161 176 182 166 146 -12% -9%
Non-gem quality 8 11 9 10 7 -30% -13%
Revenue from rough diamond sales*, $ bln 1.1 1 0.5 0.7 1.3 91% 19%
* calculated revenues in 1Q16 based on reported diamond sales prices, volumes and the product mix.        
Source: Company, Sberbank CIB Investment Research


ALROSA 2Q15 IFRS results, $ mln
  2Q14 3Q14 4Q14 1Q15 2Q15 Q-o-Q y-o-y 2Q15E A/E 2Q15C A/C
Revenues 1,371 1,159 1,257 1,199 1,086 -9% -21% 1,107 -2% 1,091 -1%
EBITDA 608 511 585 689 523 -24% -14% 531 -1% 524 0%
EBITDA margin 44% 44% 46% 57% 48% -9 pp 4 pp 48% 0 pp 48% 0 pp
EBITDA, adjusted 580 512 669 694 511 -26% -12% - - - -
EBITDA, adj. margin 42% 44% 53% 58% 47% -11 pp 5 pp - - - -
Net income, adjuted 317 174 212 436 338 -23% 7% - - - -
Net adjusted margin 23% 15% 17% 36% 31% -5 pp 8 pp - - - -
C - Consensus assembled by Interfax, adjusted for outliers              
Source: Company, Interfax, Sberbank CIB Investment Research


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