Risk outlook places emphasis on timing for placements and IPO’s

A changed market outlook is underlining the need for caution for Russian companies looking to place their shares on global markets.

Ernst&Young Partner, and CIS Advisory Leader, Igor Boldyrev, says the economic rebound of late 2010 saw Russian companies dust off their IPO plans after shelving them at the height of the economic downturn in the wake of the global financial crisis of 2008-2009.

“The 2010 autumn IPO acceleration proved two key prerequisites; global economic recovery and a traditional dependence on the financial reporting period among Russian companies. As soon as the market seemed favorable companies finalized their evaluation soon after posting 2 quarter results, and the market was awash with IPO plans.”

Pump manufacturer HMS had planned to raise up $500 million, with coal producer Koks looking for a similar amount, and Chelyabinsk Pipe setting a price range between $3.5 to $4.6 per share.Ultimately Chelyabinsk Pipe and Koks deferred their listings, with HMS discounting its.The far larger VTB share placement went ahead but with many analysts surprised to the downside with its price.

Despite the changed outlook Igor Sagiryan, Head of Investment Banking at Troika Dialog, says that that volumes this year should be vastly more than 2010.

“Despite the fact that Rusal IPO accounted for 1/3 of the total 2010 listings by the Russian companies investors are more bullish expecting the market to quintuple in 2011 to $30 billion. This target is quite reachable assuming government privatization plan.”

Mikhail Belyaev, CEO at Otkritie also believes the governments privatization plans will be a key driver, but adds that Russia’s economic rebound could encourage listing plans from within the private sector.

“In 2011, the major role on the IPO market will be devoted to the state share privatization while favorable macroeconomic situation should prompt many private companies to give preference to raising equity capital instead of attracting loans.”

He believes that the Russian exchanges still don’t appeal to international investors, and that companies listing will be looking to go international.

“Russian exchanges lack interest from foreign investors, who judge the importance of information disclosure of issuers, ease of transactions and future liquidity of the securities at these sites. I don’t think we should expect any significant increase in allocations on the Russian exchange, unless, of course, small companies fill the gap”

Alpari analyst Mihail Krylov, says that Russian companies on the listing radar include Nomos Bank, phone retailer Euroset, shoe retailer CentrObuv, Sistema’s Indian subsidiary, Sistema Shyam Teleservices Ltd, and Russia's largest champagne and sparkling wines producer Abrau-Durso.

He says that timing the placement will be the key to how successful, these companies are with their listings.

“The numbers of Russian companies will prevent them from getting more than $1 billion each, if all of them will enter all target markets simultaneously. If we assume, for example, the capacity of London market for Russian IPOs is $20-$30 billion. If top ten companies enter, then each gets $2 -$3 billion, but there will be more companies and fewer funds. The first to come to particular market will take some funds for sure. Success of following IPOs will depend on IPOs of their predecessors. Success of IPOs depends on market economy, perceptions and expectations.”

Ernst&Young’s Igor Boldyrev, who is expecting 3 to 6 significant listings on global exchanges worth between 2.5 – 4 billion dollars notes that some companies float IPO or listing plans to see what sort of reaction they get

“The reason why few companies are not willing to unveil IPO plans is based on legal commitments and confidentiality issues to prevent market stress or an unfavorable reaction. However, Russian companies sometimes use another technique – to see how the market will perceive the news of a possible company IPO. It is also has to do with competitor reaction- everyone wants to be the first and skim the cream. Companies promoting IPO plans in the media usually do so to persuade investors and assure them in company prospective plans.”

The Russian governments privatization program will attract considerable international interest with state owned stakes in Sovcomflot, Sheremetyevo Airport, Rosneft, Sberbank and many smaller entities scheduled to be listed over the coming years. First Deputy Prime Minister Igor Shuvalov, speaking at a recent forum said the Sberbank privatization would be timed to maximize value.

"It is possible this year. If we are able to get good capital, and the market shifts to good capital, and if we are in a position to get a good price, and the marketis good at thatmoment, then in thatevent the deal will be done,"

UniCredit Strategist Daniel Salter, believes that with larger and better known companies are likely to fare better in a heightened risk environment.

“In a period of heightened uncertainty, many investors prefer to reduce the risk in their portfolios, and may choose to stick close to their benchmarks – generally in such periods they tend to only look more at larger, more liquid potential IPOs, and which will likely be included in global indices (such as MSCI) and are very sensitive on pricing.”

Ernst&Young’s Igor Boldyrev says that even a weaker global macroeconomic environment is unlikely to deter a stronger company from proceeding.

“Weaker global conditions are unlikely to prevent well structured and capitalized companies from listing. This is to say that investors are always bullish about strong companies with a proven background and transparent management. Although companies may cancel or delay IPO due to low valuation anticipating a better outcome at another time, which fits their IPO strategy better.”

UniCredit’s Salter adds that the Earthquake and Tsunami in Japan, coupled with events in the Middle East and ongoing concerns about sovereign debt in the EU have added to investor caution.

“Despite the global economic recovery, there has been a pick-up in risk recently, related to politics in the Middle East, the earthquake and related nuclear problems in Japan and the still unresolved debt issues in the Euro zone periphery, as well as the inflationary impact of the recent run up in food prices globally. Add to these recent outflows from emerging market funds, and fund managers are understandably somewhat cautious.”

Although he notes the budget deficit isn’t the driver it was this time last year, Salter adds that addressing the budget deficit wasn’t the sole driver for the governments privatization program, and that prompting change, better technology, and improved market access is still likely to push the government towards selling stakes in companies it controls.

“Clearly a reduced budget deficit eases the pressure on the government to sell stakes in companies. However, we do see the government also looking to attract some strategic partners in to Russian companies in order to inject new technology and/or to give access to new markets: we have already seen an agreement between BP and Rosneft and between Total and Novatek. In that sense, the government has wider objectives in benefiting corporate Russia.”

Alpari analyst, Mihail Krylov, believes that many smaller private companies looking to list will need to be particularly cautious with timing so as to avoid large state privatization sales.

“Some companies may choose other funding instruments, and many investors would wait for state companies to enter. Russia may delay its planned $35B in state assets sales due to higher oil prices until next year. When big state firms such as Sberbank. Are still in the listing or placement pipeline I consider that private Russian companies should be very cautious with IPO plans.”

UniCredit’s Salter also believes that emerging markets, which have seen outflows over the recent past as risk aversion has mounted, are likely to return to favor later in the year, with Russia in an almost unique position to capitalize on demand for fossil fuels in the wake of renewed concerns about nuclear energy.

“Absolutely, despite risks, the global economic recovery continues, and we believe that outflows from emerging market funds are only a temporary feature, with the potential for inflows to resume again later this year.

For Russia specifically, one possible outcome from the nuclear problems currently facing Japan is a potential for the construction of nuclear power plants, particularly in Europe, to be delayed or cancelled. This should be bullish for fossil-fuels within the overall demand mix, and thus for supportive for Russia as a major supplier.”

But he notes also that in the current IPO environment pricing will have to be at a level which attracts interest.

“It is also a matter of IPO pricing – investors need to be confident that they have some upside when investing in IPOs: Russian companies need to leave some money on the table for investors”