Magnit’s Moscow Discount Is Buy Signal: Russia OvernightMaria Levitov
The largest discount in two months for OAO Magnit’s Moscow-traded shares relative to the London stock is a buying opportunity, according to BCS Financial Group.
Global depositary receipts of Russia’s biggest food retailer rose 0.8 percent yesterday, sending the premium versus the Moscow-traded shares to 26 percent. The gap reached 27 percent on Sept. 6, the highest since July 5. The Bloomberg Russia-US Equity Index of most-traded Russian stocks added 1.9 percent. OAO Gazprom, the natural gas export monopoly, jumped to a five-month high in New York. RTS Index futures contracts expiring this month gained 0.7 percent in U.S. hours.
Magnit’s London premium will narrow to 15 percent in the fourth quarter and to 5 percent in the first half of next year, according to BCS. Russia adopted a T+2 settlement this month and the nation’s equities are set to become available through Euroclear Bank SA next year to shift more trading from offshore platforms to the Moscow Exchange. The 30-day average value of trades in 10 of the biggest Russian companies tracked by Bloomberg in London is about 50 percent greater than in Moscow.
“We advise investors to add more to their Magnit exposure through the local shares,” Vladimir Savov, an analyst at Otkritie Financial Corp. in Moscow, wrote in an e-mail yesterday. The premium “should narrow significantly as we move closer to the first half of 2014,” he wrote.
The Moscow Exchange, which raised 15 billion rubles ($452 million) in a Feb. 15 initial public offering, is modernizing in a bid to lure investors to Russian equities, which are the cheapest among 21 emerging markets tracked by Bloomberg. The Micex Index trades at 3.8 times estimated earnings, compared with ratios of 13.7 for India’s S&P BSE Sensex Index and 8.9 for China’s Shanghai Composite Index, according to data compiled by Bloomberg.
Russia limits DRs to 25 percent of a company’s shares and 50 percent of listed stock, creating shortages of offshore-listed securities. Those restrictions will probably be lifted next year and Magnit’s spread will disappear, Luis Saenz, head of equity sales and trading at BCS in London, wrote in a note yesterday. He added that investors should sell Magnit’s London shares and buy the local stock.
Limits on conversion are needed until the local market’s competitive disadvantage is eliminated, Sergei Shvetsov, head of Russia’s chief markets regulator, said last month. Canceling the limits for depositary receipts when there are “shortcomings” for local shares would be wrong, he said.
“There are no indications that the DR limits will be lifted any time soon,” Slava Smolyaninov, a strategist at UralSib Capital in Moscow, said by e-mail yesterday. “This is not a done deal, quite the opposite. From the fundamental standpoint, domestic shares look more properly priced.”
While Magnit has rallied 60 percent in Moscow this year for the biggest gain in Russia’s Micex Index, its valuation is 21 percent lower than the London-listed stock, according to data compiled by Bloomberg, based on estimated earnings. Magnit rose 0.8 percent to 7,730 rubles, or $233.17, in Moscow yesterday. The GDR, which is equal to one-fifth of the local stock, climbed to $58.80.
The Bloomberg Russia-US gauge advanced to 94.99, the highest level since May 21, while futures on Russia’s RTS Index increased to 138,640. The Market Vectors Russia ETF climbed 2.7 percent to an almost six-month high of $27.94. The RTS Volatility Index, which measures expected swings in futures, rose 1.8 percent to 22.58.
American depositary receipts of Gazprom rallied 5.1 percent to $8.95, to trade about 0.5 percent above its Moscow-listed shares. A shift in the payout policy of state companies implies a dividend yield of about 9 percent for Russia’s biggest company, VTB Capital said in a note yesterday.
ADRs of OAO Mechel, Russia’s biggest producer of coal for steelmakers, climbed 6 percent to $3.53. The shares traded at a 10 percent premium over its Moscow stock.