Ben Aris in Moscow -
With a little bit of luck, Russian IPOs could make a comeback in 2014, say bankers, after investors appetite was whetted last year.
After almost five years of inactivity due to fears of a second wave of the crisis, 2013 saw several successful Russian IPOs get off the ground. All in all a total of $7.9bn was raised via five IPOs ($3.2bn) and four secondary share offerings ($4.7bn). That is more than double the $3.7bn raised in 2012, note analysts, but still a long way from the record year of 2007 when $33bn was raised.
Online payment system QIWI, mobile operator Megafon, online retail credit bank Tinkoff Credit Systems (TCS), international software engineer company Luxoft and several others managed to sell shares and saw their stock prices rise dramatically. "The best performing Russian stock was QIWI, which rose 229% from its May IPO listing price, followed by another new listing, Luxoft, which finished the year up 118%. The top five performers were all in the IT/Media sector and all US listed," says Chris Weafer, senior partner with Macro Advisory, a consultancy advising macro hedge funds and foreign companies looking at investing in Russia.
These are remarkable numbers for Russia. Pre-crisis, owners tended to be greedy and set their asking price too high; only a fraction of Russian IPOs beat the indices and several - most famously the "people's IPO" of the bank VTB - are still underwater. Technology companies, in particular, are currently en vogue and have rewarded their investors handsomely. Of the nine issues in 2013, six made money for investors, with only fertiliser company Phosagro and TCS ending the year lower than their IPO price.
The pent-up demand for IPOs is enormous and just the state companies that want to list as part of Russia's stalled privatisation drive launched in 2008 runs to an estimated $100bn, say bankers.
The privatisation programme could be a big source of funds, but the two state sales in 2013 were both in effect private placements and getting a true state IPOs away will remain a hard sell. The official plan pre-crisis was to sell $15bn of state-owned equity a year. "The $3.3bn raised from the sale of VTB equity [in 2013] was an issue from the company to boost its balance sheet. The state did not sell any equity nor did the Federal Budget receive any cash. The only public listing was the state's participation in the Alrosa IPO in October. The issue raised $1.3bn in total and the proceeds were split almost equally between the federal budget and the Yakutia regional budget," says Weafer.
Still, selling the stock of private companies should be a lot easier. Weafer estimates there is another $25bn worth of placements from the private sector in the wings and nine companies have already expressed a firm interest in trying to list in the next 12 months.
First out of the gate should be major Russian children's goods retailer Detsky Mir, controlled by billionaire Vladimir Yevtushenkov's AFK Sistema. The company said in January that it may hold an IPO as soon as July, but would like to list in the second half of this year. Two other major retailer chains - Lenta, controlled by leveraged buyout firm TPG Capital, and the German-owned Metro - have also said they might offer shares in the first half of this year. "Russia is still seen as a very attractive consumer market, the average income has increased so much," Erik Depoy, an equity strategist at Gazprombank, says. "A lot of that will reflow back into the economy. If we assume that liquidity conditions globally will remain plentiful, the primary market will have a decent year."
Shoemaker Obuv Rossii, based in the Siberian city of Novosibirsk, also plans to raise as much as RUB2bn ($60m), owner and CEO Anton Titov told reporters in October.
Chances of success
Still, despite the desire the outlook for IPOs in 2014 remains uncertain. The main problem that Russian businessmen face is the collapse in confidence amongst Russian companies. This has driven down investment and led to companies selling off their inventories rather than make new goods. The upshot is that although the labour market is drum tight and there is no output gap between supply and demand, businesses have not been investing for growth, which is leading to economic stagnation.
VTB is upbeat and argues that the government needs to do very little in the way of pump priming in the form of infrastructure investment in 2014 to get things moving again. So economists will be watching the investment numbers closely in the months to come, as investment is set to overtake consumption as the main economic driver this year. "The key to the valuation of the Russian equity market is not among assets, but rather in investments," says Alexey Zabotkin, an analyst with VTB Capital. "Only once the investment pattern changes will the Russian market start to re-rate."
The second unknown is just how the US Federal Reserve will handle its plan to unwind its quantitative easing programme. In January, the Fed said it would start slowly phasing out the free cash it has been pouring into the capital markets since the financial collapse in 2008. In addition to the impact on sentiment, the so-called "tapering" will also directly affect the amount of liquidity in the market, a large chunk of which has wound up in Russian assets in the past.
Stock pickers are being suitably cautious, which in itself could be a reason to buy: Russian stocks are currently ridiculously cheap. Russian shares were trading at a 25% discount to their emerging market peers as of the end of 2013, which is actually an improvement from the 50% discount that Russian shares were marked down to in the depths of the crisis in 2009, says Weafer.
As the year started, Russian stocks had the cheapest valuations among 21 emerging market economies monitored by Bloomberg, with shares on the benchmark trading at 4.5-times projected 12-month earnings compared with a multiple of 10.4 for the wider benchmark MSCI Emerging Markets Index.
The consensus target for the leading RTS index for this year is about 1,500 with a few banks like VTB Capital and Uralsib being a little more optimistic and predicting 1,600. However, this is still way off historical valuations for the market. Pre-crisis the rule of thumb was the fair value for the RTS is simply 20-times the price of oil, which implies the index should be at 2,000, whereas it started 2014 at 1,390. If the market returns to "normal" (whatever that means post-crisis, as clearly things have changed), Russian equities should be on track for a thumping good year.
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