Nice article. Plenty of bargains found in Russia. 6-month bear market uncovers value in energy, telecoms
cbs.marketwatch.com
By Margaret Coker, CBS MarketWatch
Last Update: 12:24 PM July 15, 1998
MOSCOW (CBS.MW) -- After six months in the grip of a great bear,
shares in Russia's largest companies are at or near lows not seen since the
summer of 1996.
That was right before the Moscow market soared on an 18-month bull
run that made it the world's best performing market in 1996 and 1997.
For those who missed this upswing and are willing to brave a trip on an
emerging-market roller-coaster, now's the time to ask where can a smart
investor put capitalize on Russia's inherent value.
Down about 60 percent this year until this week's
rally, Russia's stock market could easily double in value in the next 12 months if the government
implements austerity measures the International
Monetary Fund wants, said Alexandre Babian,
who manages $100 million in Russia for
CentreInvest Asset Management in Moscow.
Click here for today's Russian stock data.
Energy, telecommunications
Investors in Russia should balance value and liquidity, making the smartest
buys in the oil, telecom and energy sectors, say investors and analysts. On
the top of brokers' lists right now are Gazprom, Lukoil, Surgutneftegaz
(all oil and gas companies); Vimpelcom, Rostelecom, and
Kubanelektrosviaz (all telecom companies); and Unified Energy Systems,
the company that controls Russia's electric grid.
"Russia got very cheap very quickly," said Dan Rappaport, the head of
sales for CentreInvest. "Even though [politically] it's a mess, even if it has
a civil war and no president, Unified Energy Systems and Lukoil are
worth something."
Oil companies likely will be the first to stage a rebound, particularly if
world oil prices gain after producers pledged cuts in production. Some
Russian oil companies are among the cheapest buys in the world based on
their levels of production and reserves. Lukoil, which produces as much
oil as British Petroleum (BP) and has more than double the reserves, is
worth less than one-tenth of BP. At the current share price, Lukoil's
market capitalization is about $5.5 billion, while BP's is about $84 billion.
Higher costs
It's natural that Russian oil companies would be cheaper than their
Western competitors, analysts say, because their reserves are mainly in
remote areas of Siberia, making extraction more expensive. And in a
legacy of the Soviet era, many of the companies must finance everything
from kindergartens to hospitals in the towns where they are located,
adding to costs.
With crude oil trading at about $13 per barrel, it's been hard for any of
Russia's oil companies to turn a profit over the last nine months. The
exception, however, is Surgutneftegaz, the country's third-biggest oil
producer. Unlike other enterprises, Surgut has no domestic tax debt, is
not indebted to foreign creditors and is flush with cash.
"For the five top stocks to perform over the next six month, you have to
balance liquidity and stability. Surgutneftegaz would be my top pick
because the company has no debt and it has secured access to a
pipeline," said CentreInvest's Babian. Vladimir Bogdanov, the head of the
company, "made the right moves, it turns out, by doing nothing all last
year, no buying, or anything. Instead he just sat on his cash. This has
turned out to be the smartest strategy" of any Russian company, Babian
said.
Safe haven
Telecoms are a traditional favorite in the Russian
market, and are considered a relatively safe haven
by most analysts. It's a sector working near the
cutting edge of technology, where companies
realize they have to invest in new technologies to
stay competitive.
Management from companies like Vimpelcom
(VIP), Russia's largest cell phone company, are
focused on improving service and capturing more
market share, said Timothy Rosenberg, the senior
research analyst for Schwendiman Partners LLC,
which manages a Russian hedge fund. Vimpelcom
launched an IPO in New York last year, the first
Russian company to do so, and is traded on the New York Stock
Exchange as well as the Russian Trading System index.
Most Russian telecom companies have worked to install new digital and
fiberoptic lines to replace analog lines. Some, like Kubanelektrosviaz, the
company servicing the southwestern oil-rich Russian region of Kuban, are
offering value-added products like Internet service. "The telecoms are
showing better earnings, and with the Internet boom and restructuring of
tariff charges in certain parts of the country, they can only do better,"
Rosenberg said.
The sector's fundamentals also look great right now. The market crash
has driven down valuations to very attractive levels. According to
research compiled on first quarter 1998 results, by the Moscow
brokerage Troika Dialog, the telecom sector on average had a
price-to-sales ratio of 1.17 and price-to-earnings-ratio of 5.6
Cash generation
The sector is also attractive because these companies pay out regular
dividends, still not a guarantee in the Russian market, and they aren't
dependent on commodities. "I'm still bullish on the telecom sector [over
the next six months] because telecoms are one of the only sectors where
companies are cash-generating businesses," says one Moscow-based
portfolio manager.
"If you look at sales structures, telecoms have more than 50 percent on
cash on their books on average, with some companies showing as much
as 75 to 80 percent of sales in cash. Energy companies can't match that,
nor can oil."
Margaret Coker is Moscow correspondent for CBS MarketWatch.
CBSMW MarketPlace
Download business software at the CBS MarketWatch Software Store
Beat the street with books from CBS MarketWatch's Bookstore
Trade Here
Trade Here
Trade Here
Trade Here
Trade Here
Trade Here
FRONT PAGE NEWS INDEX HEADLINES COLUMNS MARKET DATA GLOBAL MARKETS MARKET MONITOR
CHARTING PORTFOLIOS MUTUAL FUNDS WEALTH CLUB STOCKCHAT TRADING CENTER
FEEDBACK ADVERTISING INVESTOR'S PRIMER
CBS MARKETWATCH RT CBS MARKETWATCH LIVE
c 1998 MarketWatch.com, L.L.C. All rights reserved. Disclaimer.
MarketWatch.com is a joint venture of CBS and Data Broadcasting Corporation. Company Information.
CBS and the CBS "eye device" are registered trademarks of CBS Inc.
|
