Citigroup Buy Swells Yandex Jump to 78%: Russia Overnight

Yandex NV (YNDX), Russia’s biggest Internet company, rallied to a two-year high in New York after Citigroup Inc. initiated coverage of the stock with a buy.

The shares climbed 1.7 percent to $38.38 yesterday, the highest close since July 2011. The gains sent valuations to 34 times estimated earnings, a 68 percent premium over the multiple for Google Inc. (GOOG) The Bloomberg Russia-US Equity Index was little changed at 99.02 yesterday, while RTS stock-index futures increased 0.3 percent to 142,980.

Yandex’s share of Internet searches in Russia increased to 62.2 percent in September from 60.5 percent a year ago, while Google’s portion shrank to 26 percent from 26.7 percent, data by LiveInternet show. Yandex has increased its annual sales forecast twice this year as it benefits from rising demand in Russia for Internet advertising, which is set to jump 26 percent a year through 2015, according to ZenithOptimedia. Citigroup said it expects shares to rally 20 percent in 12 months.

“Yandex is an undisputed leader of the market and has cemented its leadership over Google and others,” Anna Lepetukhina, an analyst at OAO Sberbank, Russia’s largest lender, said by phone from Moscow yesterday. “We are seeing more triggers for further growth in the stock price.”

The Market Vectors Russia ETF (RSX), the largest dedicated Russian exchange-traded fund, fell 0.6 percent to $28.53 in New York. The RTS Volatility Index, which measures expected swings in the stock futures, slipped less than 0.1 percent to 25.23.

Biggest Gainer

Yandex has jumped 78 percent this year, its biggest annual gain on record, making it the biggest gainer among Russia’s most traded stocks in the U.S. The stock’s premium versus Google Inc. reached the highest level in 15 months yesterday.

Internet penetration in Russia was at 53.3 percent in 2012, which compares with 81% in U.S., according to the World Bank.

Citigroup recommends buying Yandex as the company, which gets about 90 percent of revenue from text-based advertising, benefits from economic growth and increasing Internet penetration in Russia, according to the report. The bank started coverage of Mail.ru with a buy and a 12-month target price of $44 per share, implying a 12 percent gain. Mail.ru was also added to Citigroup’s focus list for the region.

Mail.ru added 0.9 percent to $39.34 in London yesterday, the highest level since May 8, 2012, and traded at 25 times estimated earnings. The company has been trading at a discount to Yandex since March, the data show.

‘Totally Unjustified’

“The discount is totally unjustified,” Alexander Vengranovich, an analyst at Otkritie Financial Corp. in Moscow, said by phone from Moscow yesterday. “There should be no discount and Mail.ru has a chance to catch up. It looks more attractive to investors because it’s cheaper and because it is expected to pay a special dividend following sale of stakes in Facebook and Qiwi.”

Vengranovich cut his recommendation on Yandex to a hold July 29 and reiterated a buy on Mail.ru in September.

Advertisement spending in Russia rose 12 percent in January through June to about 156 billion rubles ($4.85 billion), according to data by the Association of Communication Agencies of Russia, or AKAR. Internet advertising remained the fastest-growing segment as it increased 30 percent, the data show. Russian Internet advertising grew more than fivefold to 56 billion rubles in the five years to 2012, according to AKAR.

“A new version of Yandex-market expected later this year will help the company increase its share in e-commerce market and boost revenue,” Lepetukhina said. “Yandex considers entering the video content segment, which would allow it to make money with video advertising.”

Lepetukhina cut her recommendation on Mail.ru to hold from buy last month and reiterated a buy on Yandex in August.

United Co. Rusal (486), a Moscow-based aluminum producer, fell 0.4 percent to HK$2.43 in Hong Kong trading as of 10:32 a.m. local time. The MSCI Asia Pacific Index lost 0.3 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: Tal Barak Harif at tbarak@bloomberg.net

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