Luxoft Gains in U.S. as Sales Shielded From Sanctions

Luxoft Holding Inc., the best-performing major Russian stock trading in the U.S. in the past three months, rallied after raising its sales forecast and saying business has been unaffected by international sanctions.

The software developer’s shares jumped 4.8 percent to $37.90 in New York yesterday, the highest level since Feb. 27. The advance pushed a three-month surge to 34 percent, the most on the Bloomberg Russia US Equity Index, which gained 0.1 percent in the same period.

Luxoft, a unit of Moscow-based IBS Group Holding Ltd. whose clients include Boeing Co. and UBS AG, boosted its annual revenue forecast to at least $486 million from $478 million after quarterly earnings rose 28 percent. While most of its programmers are in Russia and Ukraine, Switzerland-domiciled Luxoft gets more than 75 percent of its revenue from the U.S. and western Europe.

“Luxoft is immune from the sanctions and the slowdown in Russia’s economy,” Ilya Kravets, New York-based director of investment research at Daniloff Capital LLC, said by phone yesterday. “It’s a very smart business model. Luxoft is an exporter, but unlike Lukoil or Gazprom they export talent, not raw materials. Luxoft benefits from having most of their personnel in the emerging markets and most of their customers in the developed markets.”

‘Not Impacted’

Federal Statistics Service data on Aug. 11 showed Russia’s gross domestic product expanded 0.8 percent in the three months through June, the weakest pace in five quarters, as the U.S. and European Union imposed sanctions intended to slow the $2 trillion economy to punish President Vladimir Putin for supporting pro-Russian separatists in eastern Ukraine. Citigroup Inc. this week said it expects 0.7 percent growth in 2014, down from a projection of 2.6 percent at the start of the year.

Luxoft Chief Executive Officer Dmitry Loschinin said on a conference call yesterday that the company is “not impacted” by sanctions. “We are a Swiss-reported global entity and not connected to any political circles” in Ukraine or Russia, he said. Luxoft’s fiscal year ends in March 2015.

The company also is benefiting as the Russian and Ukrainian currencies weaken, which is helping to keep wage inflation low, Loschinin said. The ruble, the most-volatile currency in emerging markets in the past month, has declined 3.2 percent against the dollar in the past three months, while the hryvnia fell 10 percent.

Analyst Ratings

Luxoft trades at 17.5 times projected 12-month earnings, compared with an average multiple of 23.9 among 50 global peers, according to data compiled by Bloomberg. Six analysts covering the company recommend buying the shares, while one has a hold rating and one advises clients to sell, the data show.

Yesterday’s gain pushed Luxoft’s 14-day relative strength index to 67.2, the highest in a month. An RSI level above 70 is a signal to some analysts that a security is poised to fall.

VTB Capital, the investment unit of OAO VTB Group, and Otkritie Financial Corp. reiterated buy recommendations on the stock after yesterday’s earnings report. Luxoft’s shares have more than doubled in New York since the company’s June 2013 debut.

Luxoft’s price-to-earnings ratio of 17.5 compares with an average multiple of 5 for companies on the Micex Index, which is the cheapest among 21 emerging-market stock gauges tracked by Bloomberg.

ETF Advances

The Bloomberg index of the most-traded Russian stocks in the U.S. rose 1.3 percent to 84.86 yesterday. The Market Vectors Russia ETF, the largest U.S. exchange-traded fund tracking the country’s stocks, increased 1.7 percent to $24.44, the highest since July 30. RTS stock-index futures decreased 0.2 percent to 121,270 in U.S. hours.

The RTS Volatility Index, which measures expected swings in the stock futures, added 0.5 percent to 34.11. Moscow-based United Co. Rusal, the world’s biggest aluminum producer, lost 0.7 percent to HK$4.05 at 10:48 a.m. in Hong Kong trading.

“While equity markets continue to price in perceived Russia-Ukraine geopolitical risk, demand for Luxoft’s services continues to ramp up and should support sustained, strong top-line growth in the medium-to-long term,” David Ferguson, Moscow-based analyst at Renaissance Capital brokerage, wrote in a report yesterday.

Ferguson reiterated his buy recommendation on the stock and target price of $48 per share.

Before it's here, it's on the Bloomberg Terminal.