The Russian equity market fell last week, mainly on the back of the news flow related to the new US sanctions against Russia. This was likely an overreaction given that the sanctions, which were imposed on August 8th and in fact do not disclose much information about the measures being taken, will likely apply restrictions only on US exports of national security items to Russia. Thus, this does not directly involve any public company or their ability to conduct business and generate cash flow for shareholders. Another drag on the equity market was the new tax proposal for metal and mining companies, which was suggested by presidential aide, Andrei Belousov.
Oil and gas companies outperformed the market, theirs being the only sector index to end the week in the black. The positive sentiment likely came from the depreciation of the rouble amid relatively stable oil prices, which likely implies further strong financial results for Russian energy companies. Rosneft’s shares, the ordinary shares of Tatneft and the preferred shares of Surgutneftegas rose by 5.3%, 3% and 4.7%, respectively, in rouble terms. Rosneft’s stock gained some additional support from its strong Q2 2018 results.
The financial services segment was hit the hardest by the news regarding sanctions, with the stocks of two state-owned banks, Sberbank and VTB, falling by 8.4% and 7.9%, respectively, in rouble terms.
In July, inflation in Russia marginally accelerated to 2.5% YoY from 2.3% YoY in June. Food prices rose by 0.5% YoY after contracting by 0.2% YoY in the previous month. The main drivers were prices for meat and poultry, which rose by 1.4% YoY in July after falling by 0.2% YoY in June, although fish and egg prices also contributed to overall food price inflation. Non-food inflation was 3.8% YoY, marginally up from 3.7% YoY the previous month. Meanwhile, prices for services decelerated to 3.8% YoY from 4.1% YoY in June. Overall, inflation remains far below the central bank’s target and we expect it to move gradually to 4% in the next 12 months.
Rosneft published strong financial results for the second quarter of 2018. Its revenues grew by 36% YoY in US dollar terms largely thanks to higher oil prices this year compared to those in Q2 2017, with Brent crude at USD 74.5 per barrel vs. USD 50.1 per barrel respectively. Mainly for the same reason, the company’s EBITDA also surged, by 72% YoY. Moreover, the company generated USD 3.6 billion of free cash flow compared to only USD 0.7 billion for the same period in 2017. Overall, we think that the results have been already priced in and the stock is rather overvalued at the moment.
VTB published healthy results for Q2 2018, reporting that its net profit rose by almost 42% YoY in rouble terms to RUB 43 billion. The bank’s net interest margin was 4.2% compared to 4.1% over the second quarter of 2017, while its return on equity rose to 11.9% this year up from 8.5% over the same period last year. Overall, we think the stock is rather undervalued for the moment relative to its ability to generate free cash flow and provide dividends to shareholders.
***
Rosstat is due to publish macroeconomic figures for July.
X5 Retail Group, Inter Rao, Gazprom Neft and Megafon are due to publish their financial results for Q2 2018.