Rostelecom a Buy to UralSib on Government Sale: Russia Overnight

OAO Rostelecom (ROSYY), the best performing Russian stock this month, is poised for further gains as the phone company takes steps to allow the government to sell its stake, according to UralSib Financial Corp.

“Rostelecom has revived investors’ interest in its shares,” said Konstantin Belov, an analyst in Moscow at UralSib, which is ranked first among 23 banks and researchers that cover the company after its recommendations delivered the best relative returns over the past year based on the performance of all securities covered. “Chances are the government will reduce its stake in Rostelecom as soon as next year and that helps the market optimism.”

Belov reiterated a buy rating last week and forecast stock in the country’s largest fixed-line operator will gain 43 percent over the next year after shareholders voted June 26 to merge Rostelecom with its parent, OAO Svyazinvest, a measure the government said was needed to simplify its ownership structure and facilitate a sale of its controlling stake. A privatization would allow Rostelecom to be better managed as competition among phone carriers intensifies, Belov said.

American depositary receipts of Rostelecom rose 7.9 percent last week in New York to $21.51, capping a 36 percent surge in the past three weeks as the stock recovered from the cheapest level versus peers this year. The ADRs closed at a 0.5 percent premium to the shares in Moscow. The Bloomberg Russia-US Equity Index rose 0.6 percent to 92.59 on July 19 for a 2.6 percent weekly advance. RTS futures (VEA) rose 0.1 percent in U.S. hours.

‘Love Buybacks’

The stock has also been driven higher in recent weeks as Rostelecom started buying back shares from investors who didn’t vote or voted against its merger with Svyazinvest, said Alexander Vengranovich, an analyst at Otkritie Financial Corp. The company set a buyout price of 136.05 rubles ($4.20) each, it said in a March 27 statement.

“Investors love buybacks,” Vengranovich said by phone from Moscow on July 16. “The market favors the new, simpler structure that the merger with Svyazinvest brings.”

Investors expect the company, which approved Sergey Kalugin as chief executive officer in March and elected a new board of directors last month, will approve a new business strategy in August, Otkritie’s Vengranovich said.

Russia may sell a controlling stake in Rostelecom for at least $5 billion as early as this year, First Deputy Prime Minister Igor Shuvalov said in an April 26 interview in Moscow. UralSib’s Belov said the sale will probably be scheduled for next year at the earliest.

ETF Advances

Futures on Russia’s dollar-denominated RTS Index rose to 137,760. The RTS Volatility Index, which measures expected swings in the stock futures, increased 0.7 percent to 24.24.

The Market Vectors Russia ETF (RSX) gained 2.8 percent last week to $27.17, rising for a fourth week in the longest stretch of advances since February 2012.

Rostelecom trades at 13 percent discount to peers on the MSCI Emerging Markets Telecom Service Index based on the price relative to estimated earnings, the narrowest gap since February 2012, data compiled by Bloomberg show. The discount narrowed from 37 percent on June 28.

Ruble futures showed the currency weakening 0.5 percent to 30.66 per dollar in U.S. hours July 19. The ruble gained 0.8 percent last week to 32.3685 per dollar and rose 0.6 percent to 36.8738 against the dollar-euro basket used by the central bank to manage swings that erode exporter competitiveness.

United Co. Rusal (486), the world’s largest aluminum producer, dropped 1.4 percent to HK$2.86 in Hong Kong trading as of 10:59 a.m. local time. The MSCI Asia Pacific Index gained 0.4 percent.

To contact the reporter on this story: Halia Pavliva in New York at hpavliva@bloomberg.net

To contact the editor responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net

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