JPMorgan’s Buy Rating Spurs Rally in Russia’s MD Medical

MD Medical Group Investments Plc, which runs Russia’s largest chain of maternity centers, gained for the first time in a week as JPMorgan Chase & Co. raised it to buy, citing cheap valuation relative to regional peers.

JPMorgan’s recommendation on the company, which has a market value of $620 million, comes as Aberdeen Asset Management Plc sees Russian small-capitalization stocks as “ridiculously cheap” after a sell-off. The MSCI Russia Small Cap Index is down 22 percent this year, following a broad decline in the country’s securities amid concern sanctions against Russia over the Ukraine war will squelch economic growth. The U.S. and European Union enforced new measures last week.

MD Medical gained 3.1 percent to $8.25 in London on Sept. 12, reducing its loss this year to 27 percent. Trading volume of 67,016 shares was 4.2 times the average of the past three months. The Bloomberg Russia-US Equity Index rose 0.4 percent as energy exporters including OAO Surgutneftegas and OAO Gazprom Neft gained on speculation a weaker ruble will boost profits.

JPMorgan cited the stock’s “compelling 30 percent discount” to peers in eastern Europe and the Middle East when it raised MD Medical from the equivalent of hold. Analyst Elena Jouronova forecast compound annual revenue growth of 26 percent through 2017 as regional expansion gathers pace, according to an e-mailed research note.

GDP Slowdown

Growth in Russia’s $2 trillion economy has been slowed by the international sanctions intended to punish President Vladimir Putin for allegedly supporting the rebellion in eastern Ukraine, a claim he denies. Barclays Plc., which projects a 0.1 percent decline in gross domestic product this year and a 0.6 percent contraction in 2015, said in a Sept. 11 research note that new measures “imply downside risks” to that forecast.

Luis Saenz, head of equity sales and trading at BCS Financial Group in London, said MD Medical isn’t as vulnerable to the slowdown as other companies whose revenue comes from domestic spending.

“They focus on high-end maternity health care and are diversifying operations throughout Russia,” Saenz said by phone. “Even as the economy slows, people won’t cut spending on maternity health care because it’s so critical.”

Sales Estimates

MD Medical, which has 17 medical centers throughout Russia including in Moscow, St.Petersburg, Perm, Samara and Irkutsk, said on Aug. 20 that it bought Avicenne Medical Center in Novosibirk for $45.5 million. The acquisition will help the company increase revenue, according to JP Morgan’s Jouronova and Saenz of BCS.

JP Morgan raised MD Medical’s revenue forecast by as 4.6 percent to $204 million for 2014 and increased its 2015 sales estimate by 5.6 percent to $265 million, according to the bank’s research note.

“Their business model is beautiful, but low liquidity in Russian small-capitalization stocks is a problem” Saenz said. “Investors are worried about the geopolitical risks and want to be able to get in and out of the market quickly.”

The Micex Second-Tier Index of companies with lower market capitalization fell 1 percent to 2,959.65 last week, extending the decline this year to 4.9 percent. The benchmark Micex Index dropped 1.1 percent last week to 1,458.52 and is down 3 percent this year. The Bloomberg index of the most-trade Russian stocks in the U.S. slid 3.3 percent to 85.46 in the five days through Sept. 12 and has retreated 16 percent in 2014.

Fund Flows

“Within the Russian space, the small-caps have sold off ridiculously,” Peter Taylor, a senior investment manager for global emerging markets at Aberdeen Asset Management in London, said in an interview on Sept. 5. “Liquidity has completely dried up. There are Russian small caps that are decent businesses that are just looking ridiculously cheap.”

MD Medical is a “nice business,” Taylor said. “The management team impresses us and the business model is an attractive structural story in Russia and yet that stock has just gone so off year-to-date.”

Futures on the dollar-denominated RTS index expiring this month gained 0.7 percent to 122,230 in U.S. hours on Sept. 12. The RTS Volatility Index, which measures expected swings in the futures, declined 1.2 percent to 32.19.

The Market Vectors Russia ETF, the biggest U.S. exchange-traded fund that tracks the nation’s stocks, fell 3 percent last week to $24.57. It gained 0.5 percent on Sept. 12.

Russia-dedicated funds attracted about $140 million in the week through Sept. 10, after outflows in the previous week, Cameron Brandt, research director at EPFR Global, a Cambridge, Massachusetts-based company that tracks fund flows, said by e-mail.

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