Renaissance R.I.E. (RIEL) - Interim Management Statement RNS Number : 2610R Renaissance Russia Infra Equities 15 November 2012 RENAISSANCE RUSSIA INFRASTRUCTURE EQUITIES LIMITED. Interim Management Statement Review of the period from 1 July 2012 to 8 November 2012 This interim management statement relates to the period from 1 July 2012 to 8 November 2012 and contains information that covers that period, unless otherwise stated. Investment Objective, Policy and Strategy The overall investment objective of Renaissance Russia Infrastructure Equities Limited("RRIEL" or the "Company") is to achieve medium-term capital appreciation. The Company seeks to achieve its investment objective primarily by allocating substantially all of the Company's capital available for investment to equity and equity-related securities of companies involved in the infrastructure sector and whose principal operations or assets are located in Russia and the CIS Region, or a material part of whose business relates to Russia and the CIS Region. Review of the Portfolio The Company's net assets increased during the period from $121.87m to $128.2m representing an increase of 5.2%, which compares to an increase in the RTS Index of 3.9% and 3.1% increase in the RTS2 Index. As such the Company's portfolio outperformed both the large cap and mid cap equity indices in Russia. Unlike in recent years, equity markets globally registered positive performance over the summer months, although the biggest positive monthly performance came in September on the back of co-ordinated quantitative easing action around the world. The European Central Bank made the first move, committing to 'unlimited' purchase of bonds issued by Euro zone governments. This was followed by the Federal Reserve's announcement of its so called QE3 programme in mid-September, which would involve monthly purchases of Mortgage Backed Securities (MBS) to the value of $40bn, in an effort to keep interest rates low and stimulate economic growth by helping re-invigorate the US housing market. Closer to home, the Russian economy continued to grow robustly with GDP growth of approximately 3.7% for the year to date in 2012. Unemployment remains low at around 5% and inflation continues to be under control, both of which are favourable for equity markets in general. However, more importantly for infrastructure spending, is the fact that the Russian Federal budget is on track to stay in surplus during 2012. For the first nine months of 2012, the budget surplus amounted to 1.9% of GDP and is forecasted to end the year at 0.5-1.0% of GDP, which provides continued support for the Russian Government's spending on large infrastructure projects. Turning to the Company's portfolio, the biggest contributors to the Company's outperformance of the Russian indices during the period were Sollers, Eurasia Drilling, Transneft and Mostotrest. Sollers is the largest independent car manufacturer in Russia and the company has a number of JVs with foreign auto makers, who are seeking to gain exposure to the fast growing Russian market. Sollers share price appreciated 74% over the period under review, driven by the strong results reported by the company for the first half of 2012. Profit margins improved by more than 30%, driven by its new JV with Ford Russia. The Company believes that this venture has far better prospects than Sollers' old JV with Fiat, as Ford is a strong brand in Russia having been operating in Russia for over 10 years, hence the improvement in EBITDA margins. We continue to be supporters of Sollers based on its fundamentals as the stock continues to trade at very attractive multiples. During the period, exposure to the Oil & Gas distribution and services sectors was increased through additions to the Company's holdings in Eurasia Drilling and Transneft. Eurasia Drilling, which has been held since the beginning of 2012, continues to perform strongly. Although Russia is the largest oil producer in the world, its oil reserves are some of the lowest amongst the major oil producers, which means oil companies (both state and private) need to be investing substantially in the discovery of new oil and gas fields. As a result, oil drilling volumes (in km) in Russia is growing at approximately 7-8% annually. Eurasia Drilling, one of the leading oil drillers in the sector, with high quality business execution and transparency, is achieving growth of approximately 15% per annum. As a result, the company's share price appreciated by 36% during the period under review, contributing substantially to the Company's performance. While we are conscious of the elevated valuation, we continue to believe in the underlying fundamentals for the company. In the case of Transneft, the company is approaching the end of its extensive CAPEX program and from the start of 2013, expenditure on maintaining and expanding its assets is likely to start declining. As a result, its free cash flow is expected to increase significantly leading to a re-rating of the stock as already witnessed, with the company's share price outperforming the RTS Index by 32% over the last few months. Despite this, Transneft's valuation remains depressed, trading on a EV/EBITDA 2012 multiple of just 2x which is considerably below the average for the Russian Oil & Gas distribution and services sector of 3.5x. In contrast to the first half of 2012, the real estate development sector negatively impacted the Company's performance during the period, despite the Company reducing its exposure to the sector early on in the period. Having benefited strongly from the sector's strong performance earlier in the year as sales grew strongly, the sector has seen a meaningful slowdown in demand in the second half of the year, which has had a knock-on impact on prices and therefore revenues. The Investment Manager was able to confirm the sector's deteriorating fundamentals at the VTB conference in October 2012 when it met all the major developers. The Company's exposure to the sector was reduced during the period, with the Company's investment in the LSR Group being exited in full and its holdings in Etalon and PIK being reduced. FESCO and HMS Group were amongst the biggest detractors from the Company's performance during the period under review. FESCO declined by 17% over the period, wiping of the gains made in the first half of the year, as uncertainty over shareholder control of the company, with Summa Group having expressed a strong desire to acquire a 56% stake in the company from Industrial Investors, headed by Mr Generalov, impacted the company. However, the deal was delayed due to financing problems for the Summa Group and that disappointed the market, pushing the share price lower. In the case of HMS Group, the company acquired a centrifugal and screw compressors company, paying a relatively high price for the company, which resulted in the shares being sold off. Looking ahead, a number of challenges for the world economy remain in place. Economic growth remains subdued in both the US and Europe and Asia is one of the few bright spots. It is therefore not surprising that we are seeing Russian companies increasingly announcing projects focused on Asian ties, as the recent experience with Gazprom showed. This has positive implications for the Russian Infrastructure sector. The development of the new gas fields of Chayanda and Kovytka will involve significant investments in infrastructure, construction of an LNG terminal in Vladivostok and a 3,200km Yakutia - Khabarovsk - Vladivostok gas pipeline. Total investments including development costs could reach $40-60bn by 2018, which will have a significant positive impact on pipe and metal producers. This should also benefit some of the Company's less liquid investments, including Spetsgazremstroi and Centrenergogaz to name a few. In addition, we continue to see good opportunities across other sub-industries within the infrastructure sector, including transportation and roads construction. Discount During the period from 1July 2012 to 8 November 2012, the Company's share price rose from $0.46 to $0.54, an increase of 17.4%. The Company's discount to its net asset value fluctuated significantly during the period but as at 8 November 2012, the Company's discount to its net asset value was 15.4%. Share Capital No changes to the Company's share capital took place during the period under review. COMPANY STATISTICS 1 July 2012 8 November 2012 Net Assets $122.7m $128.2m Net Asset Value Per Ordinary Share $0.616 $0.64399 Share Price $0.46375 $0.545 Discount to Net Asset Value 24.7% 15.4% PORTFOLIO INFORMATION AS AT 8 NOVEMBER 2012 Ten largest holdings: % of Total Assets Mostotrest 7.4% Renaissance Russian Equity Allocation 6.5% Raven Russia 5.9% Transneft 4.3% Novorossiysk Commercial 4.2% Eurasia Drilling 4.1% Globaltrans 4.1% Transneft 4.3% Aeroflot 2.9% E.On Russia 2.8% Sector breakdown: % of Equity Positions Transport 19.2% Beta Management 16.1% Construction 13.6% RE Development 9.4% Utilities 9.1% Oil&Gas Distributors 8.3% Oil services 7.0% Steel 5.7% Engineering 5.0% Telecom & IT 3.0% Building Materials 2.2% Mining 1.4% Material Events during the period During the period the board of the Company announced on 20 July 2012 its intention to restructure the Company, which would result in the transfer of the majority of the Company's portfolio of investments to a newly incorporated open-ended UCITS fund (the "UCITS Fund") (the "Transfer") that will have an investment objective and policy consistent with the current investment objective and policy of the Company. On 11 October 2012, the Company sent a circular to shareholders ("Circular") which contained details of the recommended proposals for the restructuring of the Company and amendments to the Company's investment policy and articles of incorporation, together with a notice of extraordinary general meeting ("EGM") to approve the proposals. At the EGM held on 31 October 2012 shareholders voted in favour of the proposals. As a result and as set out in the Circular, the Company will transfer its liquid investments to the UCITS Fund in return for units in the UCITS Fund ("Units"), which is expected to occur on or before 30 November 2012, following which the Company will hold, inter alia, Units in the UCITS Fund and its holdings in illiquid investments which will not be transferred to the UCITS Fund but will be retained and realised in a structured programme by the investment manager. In addition, as set out in the Circular, the Company, on or before 14 December, intends to declare an in specie dividend of Units to shareholders representing 30% of the Company's net asset value at the date of declaration of such dividend, and as a result, following the in specie dividend, shareholders will hold both shares and Units. This information is provided by RNS The company news service from the London Stock Exchange END IMSBUBDBDDBBGDU -0- Nov/15/2012 15:23 GMT
Renaissance R.I.E. RIEL Interim Management Statement
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