St. Petersburg to Moscow Boom Ending Spurs Etalon Stock Tumble

Etalon Group Ltd., a St. Petersburg-based builder listed in London, posted its biggest quarterly drop in almost two years as Credit Suisse Group AG and VTB Capital slashed earnings forecasts amid a housing slowdown.

Depositary receipts tumbled 14 percent last week to $3.43, bringing the quarterly loss to 31 percent, the worst plunge since September 2011 and the biggest among 29 multi-family housing developers globally with a market value of at least $500 million. The stock added 1 percent by 1:10 p.m. in London, trading at 43 percent of its average three-month volume. The Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. climbed 2.1 percent last week, paring the second-quarter loss to 14 percent.

Credit Suisse cut its rating on Etalon’s stock to hold and reduced its annual earnings forecast by 43 percent on June 27, citing “pricing and cost dynamics,” 12-month delays for some developments and a lack of communication from company management. Prices for new residences in St. Petersburg, Russia’s second-largest city and Etalon’s main business area, have edged up just 0.5 percent this year, after jumping 11 percent in 2012, 8 percent in 2011 and 5 percent in 2010, according to property website Byulleten Nedvizhimosti.

“This market is very intolerant of poor investor relations or management failing to deliver on promises,” Julian Rimmer, a trader at CF Global Trading UK Ltd. in London, said in an e-mailed response to questions. “Longer-term, I think they have solid prospects.”

Etalon’s press service declined to comment.

Low Valuation

Etalon is trading at 4.3 times estimated earnings for the next 12 months, the second-lowest among the group of 29 property developers and compared with 7.7 times for OAO LSR Group, Russia’s biggest listed homebuilder. LSR surged 8.5 percent in London last week, paring its quarterly drop to 3.5 percent. The stock is down less than 0.1 percent today, its first drop in four days.

New-home prices in Moscow were little changed in the first five months of this year after advancing by at least 10 percent in each of the past three years, according to Byulleten Nedvizhimosti. The Economy Ministry estimates gross domestic product growth will slow to 2.4 percent this year, the weakest pace since a 7.8 percent contraction in 2009.

Etalon’s margin on earnings before interest, taxes, depreciation and amortization, a measure of profitability, shrank to 26 percent last year from 36 percent in 2011, according to the company’s website. Changes in Moscow and St. Petersburg city governments led to delays in residential developments and issuance of permits, the company said in a Nov. 22 statement.

‘Unclear’ Environment

The delays may shrink Etalon’s margins further, according to Credit Suisse.

“Etalon’s business model is sensitive to political, regulatory, macro and cost risks, creating an unclear earnings environment,” Victoria Petrova, an analyst at Credit Suisse in Frankfurt, said in its report emailed June 27. “Investors need more regular updates on projects developments.”

Petrova declined to comment beyond the report.

VTB Capital reduced its forecasts for Etalon’s Ebitda by a cumulative 31 percent for 2013 to 2016 in a report released in April, citing development delays.

UralSib upgraded Etalon to buy today, keeping the price target at $5 on “attractive valuations.” UralSib also rates LSR and its smaller competitor PIK Group as a buy.

Slowing increases in housing prices may lure more buyers to the market, sustaining demand for Etalon’s properties, according to Marat Ibragimov, a senior analyst with UralSib in Moscow.

Good Demand

“People are ready to cut other expenses to buy housing,” Ibragimov said in a telephone interview today. “Demand is good. There is a market for them. The rest is up to the companies.”

Futures on Russia’s RTS Index added 0.5 percent to 126,410. The RTS Volatility Index, which measures expected swings in futures, fell 3.7 percent, its fifth consecutive drop.

The Market Vectors Russia ETF rose 0.6 percent to $25.18, paring its monthly drop to 0.5 percent and its quarterly retreat to 9.3 percent. OAO Mechel fell 43 percent in the three months while search-engine operator Yandex NV added 19 percent in New York.

Yandex’s surge quarter was the biggest since July-September

2012. Shares of Russia’s Russia’s largest Internet search engine jumped after the company posted a 79 percent increase in first-quarter profit in April and raised its 2013 sales target because of growth in online advertising.

Mechel ADRs

Yandex leads Google Inc. in Russian Internet searches with more than 60 percent market share versus about 26 percent for the U.S.-based company, according to data from Group Ltd., Russia’s largest social-network operator, fell 0.7 percent to $28.47 in London, its first decline in five days. is reducing reliance on advertising revenue in Russia and plans to expand against Facebook Inc. by luring mobile users with a combination of online communication and entertainment, Dmitry Grishin, chief executive officer of, said in an interview.

American depositary receipts of Mechel, Russia’s biggest producer of coking coal for steelmakers, are down 58 percent this year. The Moscow-based company announced a $100 million stock buyback plan June 18. Mechel fell 1 percent to 96.40 rubles in Moscow.