investment cases russia - east capital trip moscow 20… · lukoil • vertically integrated,...

Investment cases— Russia

Beatrice Bushati, Senior Analyst, East Capital

Uliana Pavlova, Senior Analyst, East Capital

David Nicholls, Analyst, East Capital

Yandex

• Leading Russian search engine– Search market share of 55.4%*

– Exposure to the growing Russian online advertising market

– Constant launch of innovative products and strong management team

• Strong financials in 1Q17– 5th quarters of consecutively beating consensus

– Consolidated revenues +25.0% yoy EBITDA +19% yoy

– Search revenues +23% yoy, search EBITDA by 35% yoy

• Google case– The Russian anti-monopoly authority (FAS) has settled with Google

– Google had implemented highly anti-competitive measures on Android devices

– The settlement gives Yandex the potential to improve market share on android phones, currently 38% vs other 64% market share on desktop

Best-in-class tech company with superior growth and innovative products

* As of 1Q17

2017e 2018e

EV / EBITDA 15.4 11.6

EBITDA growth 22% 40.7%

P/E 30.0 22.8

EPS growth 23.4% 42.3%

Yandex

• Yandex taxi – Taxi service aggregator in Russia/CIS

– The only taxi aggregator globally that owns its proprietary maps system

– More than 120,000 drivers connected, or ca 1/3rd of all registered Russian taxi drivers

– revenues +170% yoy 1Q17, number of rides +484% in 1Q17 yoy

• Strategic optionality– Partial sale to Russian/international PE firms imminent, valuation

rumoured to be usd 1.2bn

– Ex Taxi, Yandex trades at 10.2x EV/EBITDA ’18e

– Using multiples similar to international peers implies a valuation of usd2.9bn

– Potential sale could be followed by merger/IPO mid-term

Yandex50%

Gett25%

Other25%

Online taxi market split (# rides)

0

50

100

150

200

250

300

2013 2014 2015 2016 2017e

Yandex taxi - number of rides (m)

Real Estate Market

• Government mortgage subsidy program supportive– Introduced in spring 2015, ended Dec 16– Mortgage costs above 12% were subsidized by the government– Expected cuts in interest rates is a key driver for sales– Mortgage issuance in Russia is 5% of GDP– The attractiveness of real estate as an investment class has significantly

improved

• Demand upside from interest rate cuts*– 1.63m of household in Moscow Metropolitan Area and St Petersburg

could afford residential real estate in 2016, translating into 106.2m sqm of potential demand

– Conservative scenario: Assuming mortgage rates to decrease by 50bps annually until 2021, it would create additional demand of 94.7m sqm, i.e. doubling of demand

– “Healthy scenario: Assuming mortgage rates decrease by 100bps annually until 2021, it would create additional demand of 142.3m sqm, or almost 1.5x

– vs additional supply of 56.9m sqm i.e. no oversupply risk

Large demand upside from interest rate cuts

0% 20% 40% 60% 80%

Russia

Romania

Hungary

Czech Republic

Poland

France

Germany

United Kingdom

Mortgage issuance as a % of GDP

*MACON Reality Group, Etalon research

Etalon

• Real estate developer– Portfolio split 50/50 between Moscow and St Petersburg – Discount to NAV 43%*– Committed shareholders and management with strong incentive system

• Stellar results– Record new contract sales +35% yoy in rub ’16 vs initial guidance of 20%

growth– Average price per sqm +6% yoy in rub ’16– Cash collections +54% yoy in rub ’16– Low leverage vs overleveraged/bankrupt competitors, we expect 0.3x net

debt to EBITDA by end ‘17– Company is drawing down 150k sqm in inventories annually which

releases cash

• Commitment to dividends with increasing payout– New dividend policy introduced in May ’16, 30-50% of net income

– Dividend policy further amended in May ‘17, 40-70% of net income

Combination of growth, dividends and exposure to the Russian real estate market

Land bank valuation as of Dec 31, 2016

2017e 2018e

EV / EBITDA 8.2 4.8

EBITDA growth 22.2% 74.6%

P/E 10.3 5.9


Alrosa

• Largest diamond producer globally– De Beers and Alrosa control almost half of the global rough diamond

market

– Gives certain influence over pricing

• One of the best run government-owner company in Russia– East Capital nominates INEDs to the board

– Alrosa is one of few government-owner companies which will pay 50% of IFRS net income, resulting in 10.0% in dividend yield in 2017

– Very successful SPO in 2016 where East Capital was one of the anchor investors, placed at 7% discount

• Strong financials and free cash flow generation– EBITDA growth of 49% yoy 2016, and threefold growth in net income

– Declining CAPEX program following peak in 2017

– Strong deleveraging with FY17e net debt expected at 0.4x

– Natural rouble hedge

FCF yield of 14% in 2017 and very undemanding valuation

In Rub from placement July 2016

2017e 2018e

EV / EBITDA 4.6 4.4

EBITDA growth -6.7% 3.7%

P/E 5.6 5.2

EPS growth -17.9% 7.2%

Sberbank

• Russia’s largest and best run bank– CEO Gref focused on innovation and technology– 50%+1 owned by Central Bank of Russia, 45.6% by foreign

institutionals– Dominant position in Russia – 40% of retail loans, 47% of retail

deposits– Cheap ruble funding (91% loans/deposit ratio)– Benefit from strong growth of digital business – 47 mn active clients

of Sberbank online banking – High profitability 23% RoE in Q1’17, one of highest in world– Improved dividend payout to 25% -> 4% yield on commons, 5% on

prefs

• Strong capital and market position allows growth – 13.2% tier one capital (according to Basel I), over 10% for Basel II– Loan growth of 5-7% expected in 2017

• Valuations look very reasonable– 1.1x P/B very reasonable for such a quality bank– Superior earning growth of 22% in 2017E vs. 6% avg for GEM banks

Russian Banks by Assets, 2016

Source: East Capital estimates, Central Bank of Russia, Bloomberg accessed 26.05.17

2017E 2018E

P/B 1.1 0.9

RoE 22.0% 20.2%

P/E 5.6 5.0


Sberbank; 28%

VTB; 17%

Gazprombank; 7%

Otkritye; 4%

Rosselkhozbank; 4%

Others; 41%

Detsky Mir

• Successful IPO of 33.6% stake on Moscow Exchange in Feb’17 was the highest-profile share sale by a Russian company since 2014– Price was set at bottom of range, 85.0 – 105 RUB per share – 90% of allocation to international investors – East Capital played active role in the IPO and acquired 2.5% of the

company

• Leading specialised children’s goods retailer in Russia – 16% market share, 4x bigger than 4 largest peers combined – Price leader in most categories– #1 online operator in its segment – Strong management team

• Outstanding operating and financial results in 2016 – 31.4% YoY sales growth with 12.3% LFL sales growth– 60.0% YoY EBITDA growth with EBITDA margin 10.3% – Net debt/EBITDA improved to 1.5x vs. 3.2x a year ago

• Attractive dividend play – Low debt level -> no need to deleverage -> upside to dividends– EC expects 100%+ payout ratio vs. 50% by the street -> 8.5% div yield vs.

4.3% by brokers

High growth & dividend story

Source: East Capital estimates, Bloomberg accessed 26.05.17 * Adj. for LTI management program

2017E 2018E

EV / EBITDA 7.0* 6.3


P/E 13.9* 9.9


X5 Retail Group

• The fastest growing Russian federal food retailer – 26% YoY sales growth in Q1’17 vs. 2.8% YoY sales growth for Magnit

(excl. drogeries business)– Aims to double business over 3-4 years– Turnaround of Pyaterochka discounter format turnaround is ongoing at

full speed, Perekrestok supermarket is on the way

• Co is in unique position with improving store economics– Increasing sales densities of the main discounter format thanks to smart

promo activity and intelligent assortment – Growing business scale -> upside risks to Co’s profitability, not yet priced

in by the market

• Strong operating and financials results in Q1’17– 34% YoY EBITDA growth with improved EBITDA margin of 7.6% (vs

7.1% in Q1’15)– 65% YoY earnings growth – 7.8% LFL sales growth

X5 has just taken the #1 market position

Source: East Capital estimates, Bloomberg accessed 26.05.17

2017E 2018E

EV / EBITDA 7.3 6.3


P/E 16.1 12.4


X5 Group vs. Magnit

• X5’s customer-centric approach vs. Magnit’s margin-driven business – who wins? – In highly fragmented market strong top-line growth can be sustained

through rapid space growth

– Though it’s more difficult to keep positive traffic when competition is high and customer is not a priority #1


X5 Group vs. Magnit

Source: company data, JP Morgan

5%

7%

9%

11%

13%

15%

EBITDA margin - X5 vs. Magnit

Magnit X5

7%

9%

11%

13%

15%

17%

19%

21%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Lease-adj.ROIC ex-goodwill

Magnit X5

X5 Group Magnit

Business model

Consumer-centric approach, strong marketing/promo expertise

Margin-driven business with strong logistic backbone

Key focus Focus on driving LFLs and asset turn - more fresh products in the mix, more promo

Focus on gross margin maximization predicates different approach to assortment selection

Management structure

Decentralized Centralized

Asset ownership

Rely on leased stores, DCs, no vertical integration plans

Prefer asset ownership and vertical integration

X5 new management team has been using capital more efficiently and underlying ROIC is now comparable to Magnit’s

•

Lukoil

• Vertically integrated, privately owned oil and gas company – Over 2% of the world's oil production and around 1% of the proven

hydrocarbon reserves– CEO and VP for Strategy own 33% of company

• Company screens very well on all financial metrics vs global peers at 3.4x EV/EBITDA for 2017

• Strong and progressive dividend supported by FCF

• Focus on higher margin barrels– Increasing proportion of production coming from greenfields with very

attractive tax breaks – By 2018, at USD 50/bbl, FCF from the largest greenfield Filanovsky would

finance c. 50% of the dividend

Market cap USD 42bn

8.8% in Russia Fund and 6.4% in EE Fund


2017 2018

EV / EBITDA 3.4 3.0


P/E 5.8 5.1


Lukoil


EBITDA growth

Earningsgrowth

P/EEV/

EBITDAFCF Yield Dvd Yield

Lukoil 15.9% 99.3% 5.8 3.4 9.4% 8.3%

EC vs Cons 2.1% 3.0% 1.9% 0.9 pps

Rosneft 41.5% 190.5% 6.1 3.9 9.7% 5.7%

Gazprom 8.5% -21.3% 3.9 3.6 -0.4% 6.6%

Tatneft 16.5% 18.7% 7.1 n/a 5.6% 3.6%

PetroChina 9.4% >200% 53.5 4.9 10.5% 1.3%

Petrobras 55.2% >200% 11.2 4.8 11.1% 3.4%

Chevron 150.7% >200% 23.3 7.3 3.8% 4.1%

BP 133.7% >200% 18.2 5.6 3.3% 6.4%

All figures for 2017

Lukoil

METExport

DutyTotal

As % of oil price

Standard Field 17.5 11.5 29.0 58.1

Filanovsky 7.5 0.0 7.5 15.0

Pyakyakhinskoye 7.3 11.5 18.8 37.5

Yaregskoye 0.0 1.8 1.8 3.6

Korchagin 7.3 0.0 7.3 14.5

Taxes per bbl at Urals USD 50 / bbl based on 2017 tax formulasFCF from Filanovsky will cover c. 50% of dividend by 2018

Novorossiyk Port

• Europe’s third largest port system, handling 147 million tonnes of cargo annually, 55% of which is crude

• Revenues in USD, costs in RUB -> EBITDA margin 78% in 2016

• Strong dividends supported by robust FCF - 18% dividend yield for 2016, vs FCF of 16%. We expect 9% yield and 13% FCF for 2017

• Very attractive valuation compared to peers:

Market cap USD 2.5bn

1.1% in Russia Fund and 0.7% in EE Fund

+24% YTD in USD


2017 2018

EV / EBITDA 5.4 5.0

EBITDA growth -1.8% 2.3%

P/E 6.5 6.3

EPS growth -38.8% 3.9%

Company Country PE 2017

Global Ports Russia 8.0

Santos Brazil Brazil 43.0

Shanghai International China 19.2

International Container Terminal Philippines 25.2

Adani Ports India 19.8

DP World Dubai / Global 15.9

Novorossiyk Port Russia 5.4

Dubai

Hong Kong

Luxembourg

Moscow

Oslo

Stockholm

Tallinn

Spasibo!Thank you!

Important information

Every effort has been made to ensure the accuracy of the information in this document but it may be based on unaudited or unverified figures or sources The information in this document should not be used as the sole basis for an investment East Capital’s services and investment products may not be available to all people in all jurisdictions East Capital’s services and investment products may not be offered, sold or distributed in any country unless such offer, sale or distribution is made in accordance with local registrations or any applicable exemptions from any registration requirements provided by the local laws and regulations Information about our services, investment products, prospectuses, financial reports, distributors and where the funds are registered for sale can be obtained at East Capital (www eastcapital com) Investment in funds always involves some kind of risk Past performance is no guarantee for future performance Fund units may go up or down in value and may be affected by changes in exchange rates Investors may not get back the amount invested As East Capital invests in foreign markets, currency fluctuations can affect the funds’ values

investment cases russia - east capital trip moscow 20… · lukoil • vertically integrated,...

Documents