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Why Alken's AA-rated duo are piling back into Russia
by James Phillipps on Nov 05, 2013 at 15:46
Nicolas Walewski and Marc Festa, the Citywire AA-rated managers of the Alken Absolute Return Europe fund, have bought back into unloved Russia.The pair have snapped up stakes in Gazprom and Sberbank, which at 4.3% and 3.6% of assets, respectively, are now the €800 million fund’s two single largest holdings.
‘Russia is the cheapest emerging market, but few people are looking at it,’ Walewski said.
‘Today’s valuations are below long-term averages, even for Russian standards. We think it is time to look again. We have traded Sberbank and Gazprom quite successfully in the past. In 2008, we got out at the top of these stocks.’
'Sberbank's share price could double from here'
Walewski points out Russia’s banking market remains underpenetrated, with about 110 million bank accounts but low take-up of credit cards and insurance policies.
With a 30% overall market share and 50% of the mortgage market, Sberbank is well positioned to benefit from rising demand for financial services and Walewski plays down concerns about its ownership structure.
‘While it is more than 50% owned by the central bank of Russia, it is a benevolent regulator and shareholder, so we do not foresee significant policy interference from the government,’ he said.
‘The valuation of Sberbank is low. It trades at just above 6x earnings on 15% structural earnings growth, while it is also at 1.2x book on 20% return on equity. In addition, it has a 3% dividend yield, which looks a little bit low as the government is putting pressure on the state-owned companies to increase this markedly.
‘The annual net income of Sberbank has more than tripled from before the crisis in 2007, but over the same period of time the share price has pretty much been flat. There has been a massive compression of multiples. This is a stock that could double over time.’
Gazprom’s valuation is ‘hard to justify’
The index giant saw its production levels fall by 10% between 2007 and 2012 on the back of falling European gas demand. This was exacerbated by its main clients demanding to move from oil price indexation to spot prices during contract renegotiations.
But Festa believes this is all priced in and the company has now turned a corner. ‘Gas demand has now stabilised and should remain flat over the coming years. But what is important for Gazprom is competing supply is declining. European production has also been falling and is expected to continue downward,’ he said.
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