The Russian equity market ended last week in the black, mainly supported by positive investor sentiment in reaction to the strong second quarter 2018 financial results from many Russian companies. Higher oil prices supported the positive mood, as the price for Brent crude rose by 1.5% over the week in US dollars terms. The oil price rise was partly due to the news that China plans to accelerate its economic growth by increasing its investment in infrastructure, which in its turn could boost demand for some commodities, including oil.
Russian equity market dynamics
The Russian equity market ended last week in the black, mainly supported by positive investor sentiment in reaction to the strong second quarter 2018 financial results from many Russian companies. Higher oil prices supported the positive mood, as the price for Brent crude rose by 1.5% over the week in US dollars terms. The oil price rise was partly due to the news that China plans to accelerate its economic growth by increasing its investment in infrastructure, which in its turn could boost demand for some commodities, including oil.
Metal and mining companies outperformed the market last week thanks to Polyus Gold and Norilsk Nickel, whose stocks rose by 9.8% and 5.8%, respectively, in rouble terms. Polyus Gold mainly benefited from its healthy trading update for Q2 2018, as the company reported its output grew by 23% YoY. Meanwhile, the share price of Norilsk Nickel likely grew on the back of an increase in nickel prices over the week.
The consumer goods segment lagged the market mainly due to M.video, whose share price fell by 4.3% in rouble terms. There was no news to justify this, as the company posted a healthy trading update, reporting that its like-for-like sales have risen by 15% YoY.
Main Russian news
The Central Bank of Russia (CBR) decided to keep its key rate at 7.25% at its monetary policy meeting on Friday. The decision came amid concerns about the possible effect of an increase of Value Added Tax to 20% from the current 18% on inflation and inflation expectations. The regulator assumes that the tax rise could nudge inflation above its target level of 4% for a limited period next year, but that as this would be a one-off effect and the CBR intends to maintain a prudent monetary policy, inflation should stabilise at 4% by the beginning of 2020. Nonetheless, the CBR said it might move to a neutral monetary policy in 2019 should there be no additional pressure from inflation risks, which include volatility in commodity prices, the geopolitical situation and changes in consumer behaviour. Overall, we think there could be an additional 50-75bp in rate cuts over the next 12-24 months.
Novatek published strong IFRS results for the second quarter of 2018. The company’s revenue surged by 41% YoY to USD 3.2 billion, mainly thanks to higher average commodities and sales prices. Consequently, the company’s EBITDA also grew substantially, by 44% YoY in US dollar terms. Novatek’s operating cash flow rose by around 60% YoY, which was likely used to finance investments, as the company’s capital expenditure doubled in the second quarter of 2018 compared to the same period last year. However, we think that the future benefits from the company’s projects, including Arctic LNG, are already priced-in and that the stock is overvalued at the moment.
As expected, Magnit published weak results for the second quarter of 2018. Its revenue grew by 6.5% YoY, mainly on the back of increasing its sales floor space by 11.7% YoY, while like-for-like sales fell by 5.4% YoY. Its gross margin contracted to 24.5% in comparison with 24.9% in Q1 2018 and 26.2% a year ago. This is likely explained by the company’s plan to sell off its inventories at a discount to boost traffic. Meanwhile, the company cut its costs: despite the growth in sales space, operational expenditure remained flat. Overall, we think the stock is likely to continue to remain under pressure this year due to tough competition and uncertainty regarding the recent management reshuffle between two major players – Magnit and X5 Retail Group.
Author: Maria Rybina, investment specialist
To watch...
Several steel and power utility companies are due to publish their IFRS results for Q2.
Sources: cbr.ru, VTB Capital, TKB Investment Partners (JSC); as of July 2018