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Russian Plays for Your Watch List

September 14, 2013 | About:
Fede Zaldua

Fede Zaldua

3 followers
Even when Russian equities have outperformed EMEA's (Europe, Middle East and Africa) average performance by 7% year-to-date, I have to concur with Credit Suisse's analysts. Its time to increase exposure to the country even further. Out of the ten reasons the Swiss bank's analysts offer to explain their positive views on Russia's equities market, I think five of them are indeed very powerful: (i) Chinese growth has stabilized and this should support commodity's prices, (ii) the Euro-zone recovery should help the Russian economy, (iii) Russia a very attractive dividend play across Emerging Markets, (iv) Russia's external position is the strongest within the EMEA region (running a surplus as high as 2.8% of GDP) and (v) Russian equities still look attractive from a valuation standpoint.

Credit Suisse's analysts offer six long equity ideas. Out of those ideas, I think two are in fact attractive enough in order to include them into my watch-list. Let's take a look at them.

Growth at a Good Price[/b]

[b]Sberbank
(SBRCY), which is Russia's largest lender, is growing its mortgage portfolio fast while management is focused on loan quality and margins. Even when the company's guidance has been revised down, the market expected a significantly higher cut.

All of the above being said (growth and smaller than expected earnings cut), I like the bank's wonderful valuation level. Sberbank trades at 2014 90% of its tangible book value and 5.7 times earnings. Given Sberbank's strong profitability (18% return on equity), its strong market share position (46% of Russian household deposits) and the value of its franchise, I think the company is a good long when you are looking into having exposure to Russia's economy.

After the government decided to sell 7.6% of the bank to the public in 2012, the stock has been largely held by funds such as Grantham's GMO.

Continued Growth at a Discount

Mobile Telesystems (MBT), held by investors such as John Hussman, has an impeccable financial position (net debt stands at 1.17 times EBITDA) while its operating trends remain strong. The company's mobile service revenue performance is growing at a 6.6% year-over-year (yoy) pace while the company is taking market share in the data segment (37% yoy growth). The company is also a play in other Emerging Economies where the telecom sector is still growing and pricing trends are not as aggressive as in the Euro-zone -where price wars squeezed margins up to an unsustainable level. Mobile Telesystems operates in Ukraine (which is delivering better than expected results) and in Uzbekistan, where the company is growing its top-line at a 6% yoy pace.

Meanwhile, Mobile Telesystem's valuation remains very attractive at 2014 4.9 times EBITDA and 10.6 times earnings, a 20% discount to MegaFon, which trades at 2014 6.2 times EBITDA and 12.8 times earnings. On top of all the facts above, Mobile Telesystems pays a 3.7% cash dividend yield.

Bottom Line

Despite all the governance problems some Russian corporations have had in the past, its possible to find good opportunities in its growing market. Both Sberbank and Mobile Telesystems look like sound businesses that, at the right price level, could be good ways to get into this huge developing and commodities rich country.


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