FINAM - Daily Market Watch - Aug 10, 2010

Market Roundup

On Monday the Russian stock market showed growth amid the absence of macroeconomic statistical data from abroad. In the upshot, the RTS index gained 0.7% and the MICEX index advanced 1.1%. Stable commodity prices have lent marked support to metal sector issuers, as Severstal rose 1.8% and NLMK climbed 1.4%. Norilsk Nickel added a solid 3.1% on news about a timely dividend payout. The oil & gas sector is also noteworthy: Gazprom edged up 1.7%, Rosneft added 1.1% and Lukoil ended 0.5% higher. Shares of Russia’s largest banks also gained in value, with VTB rising 1.5% and Sberbank climbing 0.8%. The overall, generally rosy picture in the power utilities sector was somewhat marred by the outcome of trade in OGK-1 shares (down 0.2%), while all other OGKs advanced, with gains led by OGK-4 (up 2.0%). RusHydro finished the session 1.6% up. The main story in the telecoms sector was seen in Rostelecom preferred shares, which jumped 4.7% ahead of the deadline for presentation of the shares for buyout as part of a process to reorganize Svyazinvest telecoms assets. MTS added a modest 0.2%.

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The S&P 500 broad market index added 0.6% yesterday. All of the sectors included on the index ended the day in positive territory. The telecoms sector outperformed, adding an average 1.1%. By contrast, Asian stock markets are under pressure from external negativity, caused by two main reasons:
1) Investor confidence in Australia has fallen to its lowest point in more than a year.
2) Sluggish growth of real estate prices in China, as well weak export growth in July, may be indicative of slowing economic growth rates in China.
Commodity markets stayed relatively calm. WTI oil contracts are pulling back as part of a technical correction, but are still hovering above USD 81 per barrel, while base metals are mostly gaining in price.
Of the US market-moving data due out today, we note 2Q data on labor productivity and unit costs in the US economic sectors unrelated to agriculture (due out at 4:30 pm), data on warehouse inventory in June (6:00 pm) and the US IBD/TIPP Economic Optimism Index (also due out at 6:00 pm).
We view this morning’s external environment as rather uncertain for the Russian equity market. At the same time, we expect the market to be dominated by upbeat trends in the first half of the day, allowing equities to open higher. The probability of this scenario is supported by rallying futures contracts for the RTS index, which are adding 0.2%.

Breaking News

Oil closes above USD 81 on optimism about US economic recovery. Light, sweet crude for September delivery climbed 78 cents, or 0.97%, to settle at USD 81.48/bbl, having traded from USD 80.71 to USD 81.76. London Brent crude gained 83 cents to settle at USD 80.99/bbl. Crude futures moved higher Monday for the first time in four sessions, edging back above USD 81 on expectations that the US Federal Reserve will keep borrowing rates low and may signal its readiness to print more money to prop up an anemic economic recovery. Trading was choppy, with oil's gains limited as the greenback rose slightly after falling to a three-month low versus the euro Friday, while US and global equities markets headed higher. Oil prices have retreated from last week's high of nearly USD 83/bbl, dropping 1.6% on Friday in the wake of a disappointing US nonfarm payrolls report. The Fed, at today's meeting, is widely expected to keep interest rates near zero for an extended period.
Traders are also watching to see if officials are more worried about economic recovery or the threat of sinking into a cycle of falling prices and moderating growth. The dollar made gains against major currencies as investors squared positions before the Fed's policy announcement. We think that geopolitical tensions and the risk of an incident between the West and Iran over Tehran's nuclear program remained supportive to oil prices yesterday. Iran has started using additional facilities installed this year to enrich nuclear material to higher levels more efficiently, in violation of UN sanctions. A confluence of slight equities strength, geopolitical tensions involving Iran's developing nuclear technology and a potential storm development that could find its way into the Gulf of Mexico, all kept crude oil futures higher yesteray. A low pressure system over the GoM strengthened and had a medium 30% chance of strengthening into a tropical depression over the next 48 hours as it moves toward the Louisiana coast, the US National Hurricane Center reported. Moving forward, with the end of the earnings season in sight, we believe prices could pull back unless some long-term fundamentals arise. In the interim, weather reports and geopolitical factors could nearly balance out negative macro data stateside.

Synterra redeems 65% of series 1 bonds worth RUB 1.9 bn. On August 9, Synterra redeemed 1 947 197 of series 1 bonds at a par value of RUB 1000, thus paying back 65% of the overall RUB 3 bn bond issue and spending a total of some RUB 2 bn on the bind retirement. The 5-year series RUB 3 bn series 1 bond issue was placed by open subscription on the MICEX in August 2008. The issue was arranged by Promsvyazbank and Deutsche Bank. The bond has ten 6-month coupons. The first coupon rate was defined at placement at 11%; the second coupon rate was set at an equal level. Coupons 3-4 were set at 17.5%, and coupons 5-10 at 0.01%. In August 2009, Synterra redeemed just slightly over 33% of the bond for RUB 1.02 bn. The bond matures on 1 August 2013.

TNK-BP to aid fire victims. TNK-BP has decided to provide financial assistance in fire-fighting and grant aid to homeless fire victims in some of its operating regions: Ryazan, Kaluga, Nizhny Novgorod, Orenburg and Samara Regions. In particular, the oil company is to grant funds for fire extinguishing and recovery works in the Buzuluk Bor national park, a natural reserve of federal significance. At present, fire teams of TNK-BP subsidiaries assist the Emergency Ministry’s fire brigades in fire fighting in Ryazan, Saratov and Orenburg Regions. The company also is also taking all of the necessary precautions to protect its gas-filling stations, production and refining facilities.

Rosneft repays debt to Yukos Capital. Rosneft has fully repaid the amount due in a lawsuit filed by Yukos Capital, a former subsidiary to the Yukos oil company. “We paid off the FX portion on July 6 and the ruble portion on August 10. The debt has been fully repaid”, a Rosneft spokesperson said. In late June, the Supreme Court of the Netherlands refused Rosneft the right to appeal against Yukos Capital’s USD 400 mn claim, and the oil company pledged to recover the said amount. The money is actually a loan, issued in 2004 by Yukos Capital to Yuganskneftegaz, Yukos’s then-primary production asset. Later, when Yukos was declared bankrupt, Yuganskneftegaz was acquired by Rosneft, which defaulted on the loan.

VEB stops accepting mortgage refinancing applications from banks. VEB has stopped accepting applications for mortgage refinancing via the buyout of mortgage bonds, saying the number of accepted bids from commercial banks and mortgage institutions had reached the peak value of RUB 150 bn, set by VEB supervisory board. It was previously reported that Gazprom Bank had filed an application for the mortgage bond buyout worth RUB 30 bn, Sberbank for the same amount, Uralsib for RUB 20 bn, Khanty-Mansiysk Bank for RUB 7 bn, Investtorgbank for RUB 6 bn, Orient Express, VTB 24 for RUB 5 bn, and Housing Finance Bank for RUB 2.5 bn. In addition, VEB has confirmed it may also purchase senior tranches of mortgage bonds arranged by Association of Mortgage Companies for a total of RUB 19.5 bn, of which RUB 3 bn are to be funded out of the pension accruals fund at a 9% coupon and RUB 6.5 bn out of VEB equity funds at a 3% coupon.

Mechanical engineering

Sollers publishes positive operating results for July

July sales of passenger cars and LCVs by Sollers shot up 64% y-o-y, continuing to outpace the 48% industry average. We point out that July sales were up over the previous month.
In 7M2010, Sollers sold 39,081 passenger cars and LCVs, up 34% y-o-y. In July, sales shot up 64% y-o-y to 6,885 units. We estimate the operating results from Sollers for July and 7M2010 as positive. Firstly, sales by the company continue to advance at an above-average rate. In July, sales by the automaker shot up 64% against the average market growth of 48%. A similar picture was observed in January-July, with 34% sales growth for Sollers against 9% expansion of the broad market. Thanks to an in-house car assembly, Sollers can offer customers more competitive prices, as our estimates show. Moreover, sales growth accelerated to 64% in July from 50% in June. We estimate the company to sell 77,900 automobiles in all of 2010. Our 12-month target price for one common share in Sollers, taking into account its plans to form a JV with Fiat, is USD 36.4, which implies an upside potential of 110% and corresponds to a BUY rating.

GAZ Group reports neutral operating results for June

GAZ Group’s LCV sales surged 20% y-o-y in June 2010. We predict LCV sales to rise with a lag to passenger car sales, due to different demand factors of the two vehicle groups.
On August 9, AEB revealed Russian passenger car and LCV sales data for 7M2010. In line with the report, GAZ Group sold 34,900 LCVs in 6M, up 24% y-o-y. Sales growth slowed down in July: the company sold 6,200 vehicles, up 20% y-o-y. We are neutral about GAZ Group’s sales results. On one hand, the company showed a quicker recovery in car sales in 7M2010 compared with an average market growth rate of 9%. On the other hand, sales growth in July slowed down to 20%, at a time when the market showed an average 48% upturn. In our opinion, LCV sales should rise to precrisis levels with a lag to passenger car sales, due to the different demand factors of the two vehicle groups. Demand for light commercial vehicles is defined by the size of corporate capex, which have just started growing, and unsteadily at that. Meanwhile, consumer spending, which determines demand for passenger cars, has been on the rise for 12 months. The fair value of GAZ Group (RTS: GAZA) is USD 42.90 per common share with a 61% upside and a BUY rating and USD 21.50 per preferred share.


Official forecast for grain harvest in 2010 has been cut again. The current outlook is 60-65 mn tons
Another downward revision of the outlook for Russia’s grain harvest in 2010 and statements about the possible extension of the ban on grain exports from Russia send a negative signal to market participants and could stoke growth in grain prices and other farm produce, which may play into the hand of Russian farm producers.
Prime Minister Vladimir Putin voiced a new official forecast yesterday for a Russian grain harvest in 2010 of 60-65 mn tons, down from the original target of 97 mn tons voiced in April. The Prime Minister has also stated that the ban on Russian grain exports could remain in force after December 31, 2010. Given the market estimates of the domestic grain consumption at 75-78 mn tons in 2010, the available Intervention Fund reserves of 9.5 mn tons and the leftover from last year of 21 mn tons, grain reserves should be sufficient for this year. However, prospects for next year are fairly uncertain and the implications of the ongoing severe drought in Russia may be far more complicated than initially thought. The drought could also adversely affect sugar beat production. According to the Russian Agrarian Research Institute, Russia may produce 3.3 mn to 3.4 mn tons of sugar in 2010, if conditions are favorable, up from 3.2 mn tons in 2009. However, should the drought persist or aggravate, production may contract to 2.8 mn to 3.0 mn tons, which would spark growth in sugar prices. In our view, growth in grain and sugar prices would benefit Russian agrarian companies. Among the publicly traded companies, the prime beneficiaries could be Razguliay Group, a diversified agrarian producer, and the Pava and Melnik agrarian companies. In our view, current pricing trends on the market could lend support to their shares. Based on our estimate of a fair value for liquid shares in the sector, using a market peer valuation approach, Melnik shares represent a good investment idea. Given their current quotes, the shares are estimated to be undervalued by 111% on the market. Our fair price for one common share in Melnik is USD 1,582. On the contrary, Pava and Razguliay shares now trade at a substantial premium to market peers, at 47% (the fair price is USD 0.2 per share) and 25% (USD 1.2), respectively.


State share in NCSP included on list of assets to be privatized in 2010
The inclusion of the government’s share package in NSCP on the list of assets due to be privatized this year might have an upward impact on the seaport’s stock valuation. In the meantime, we do not expect the package to be privatized earlier than in 1H2011.
On August 9, the Russian government revealed the list of state-run assets due to be privatized in 2011, approved August 4. The list includes Russia’s largest seaport, Novorossiysk Commercial Sea Port (NCSP). We are moderately upbeat on the news, as preparations for the privatization should improve the information background around the company and draw investors’ attention to its shares, which could act as one of the most powerful upside drivers over the shortterm. However, we believe that the time left till the end of the year will not be enough for related ministries to work out all documents necessary for the privatization and arrange for a road-show. As a result, the asset is unlikely to be privatized earlier than in 1H2011. We estimate the 12-month target price for Novorossiysk Commercial Sea Port (RTS: NMTP) at USD 0.24 per share with a 54% upside.

Grigory Yudashkin
Deputy Head
Private Investments Department
Finam Investment Holding
Daev Plaza Business Center
Daev Lane 20, office 209
Moscow, 107045, Russia
Tel: +7 (495) 604-8168
Fax: +7 (495) 604-8107
E-mail: yudashkin@finam.ru

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