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Is Magnit fairly priced based on comparables?Date: 24 Feb 2014 23:55
Magnit (MGNT:MICEX, MGNT:LSE) is a ~$24b market cap Russian food retailer with stunning growth and high EV/EBITDA multiple.
Magnit trades on MICEX and has GDRs on LSE which trade with 12.5% premium.
The growth of Magnit is expected to show slight slowdown based on management estimates as of Jan 27, 2014.
EV/EBITDA 2013 = 13.6x for MICEX and 15.2х for LSE – is it cheap or expensive vs. other stocks?
As Magnit’s growth is fast it has limited number of comparables both among food retailers and Russian companies (will be shown below). So how should we think about Magnit’s valuation multiple? Specifically, I would like to answer two questions:
Russian stocks comparables based on EV/EBITDAEstimates are not very reliable for Russian companies in the dataset (Magnit has 16.1% for Revenue and 14.4% for EBITDA growth), so I use only LTM numbers (vs. NTM).
Magnit has one of the highest valuations on Russian stock market on EV/EBITDA so there is nothing to compare it with. Below are Russian stocks with EV/EBTIDA LTM>10x or EV/EBTIDA NTM>7x (stocks with EBITDA growth > 100% or <-50% were excluded). RBC is not very useful – its high valuations are very influenced by high leverage: Net Debt / EBITDA = 12.4x
Russian stocks with EV/EBTIDA LTM>10x or EV/EBTIDA NTM>7x
Thought, if we analyze these numbers, they tell us: comparable EV/EBITDA LTM multiple is 4-6x for any company with growth > 20%
US food retailers comparables based on EV/EBITDAIn the US NTM estimates are quite good so I will use both LTM and NTM numbers.
Note: two off points were excluded
US food retail EV/EBITDA multiples provide the following comparable valuation:
EM food retailers comparables based on EV/EBITDAAs the quality of NTM data is not known, I will use only LTM numbers.
EM ex. Russia food retail EV/EBITDA multiples provide the following comparable valuation:
ConclusionsComparable EV/EBITDA multiples are in the table below.
Magnit comparable valuation
1. What should be Magnit's valuation based on comparables?
Russian companies are so cheap due to Russia country risk and corporate governance discounts.
Magnit has a very professional CEO and management team which on my opinion put Magnit very close to US standards of corporate governance (as a side idea, this strong corporate governance actually makes me believe that the projected growth will actually happen).
This makes Russian multiples not very relevant.
EM valuations today are
a) driven mostly by speculative foreign capital which invests in EM on a “reminder basis”
b) still very influenced by expectations that the economic growth happened during 2000s commodities super-cycle will repeat
My view is that Magnit's valuation should be quite close to US multiples with additional Russia country risk discount, as US market at the moment
a) has fair value on the basis of different indicators
b) is the best in absorbing information about long term prospects of the economy
If we take a look at Magnit comparable valuation table above, we will see that based on EV/EBITDA LTM multiples EV discount is zero, so Russia country risk discount is also zero. Or, the market appreciate food retailers' growth in the US as much as in EMs.
2. How fast will Magnit’s multiple and share price decrease because of growth slowdown?
If we assume that US NTM multiple curve is fair, what is expected Magnit stock growth in 1 year, dependent to revenue forecast (NTM) at the beginning of 2015?
Magnit EV/EBITDA sensitivity to EBITDA growth
Breakeven point is around growth change of -6%: if 2015 revenue growth forecast change is >-6%, Magnit stock will appreciate, if less, than depreciate. If it’s >-3%, the stock will show > 10% appreciation.
Based on comparables Magnit has 22% upside for MICEX price and 10% for LSE price. If Magnit's revenue growth estimation decreases less than 3% in one year, its comparable valuation would increase 10%+. Again, this is only what comparables tell us and could not be considered as a complete investment recommendation.
US equity market returns in even vs. odd yearsDate: 24 Dec 2013
Equity market is cyclical; moreover, it’s a composition of several cycles – long, medium, and short. To identify these cycles and understand where we are in each of them is a complex research task.
At the same time there is simple idea on the ground that equity returns in even and odd years are different. Here I would provide evidence and explanation of two observations:
EvidenceS&P data for 1951-2012 daily returns (with dividends and splits) was used to prove and illustrate these effects.
You can see visually on the chart below that S&P returns in odd years are usually higher than in preceding or subsequent even years.
On the next chart “Christmas rally” effect is analyzed. It’s more difficult to notice the difference as equity market performance during 11 days on average is not that big, so if you don’t see it below you will see the same in numbers.
1991 Christmas rally generated 7.8% one off return, I made a separate calculation without it.
So during 1951-2012 period:
ExplanationWhat could explain such a behavior? According to Trevor Greetham Fidelity International’s’ director of asset allocation it’s based on global inventory levels. “The inventory cycle typically lasts about two years. ‘Up’ years are good for company profits and equity prices with the inverse true when inventory levels are being drawn down. And over the last decade, Greetham notes, the ‘stocking up’ years have been odd-numbered calendar years while inventory draw-down years have been even-numbered ones.”
To check this I looked at average values for ISM Manufacturing Inventories Index during 1948-2013. The definition of this inventories index is:
“Inventories: reflects the increases and/or decreases in inventory levels”
Note: 2013 data is up to November
As the index changes the behavior since ~1990, the average for two periods was analyzed having in mind that 1990-2013 is more representative.
ISM Manufacturing Inventories Index average
Indeed there is a noticeable difference in even vs. odd years, and this proves the idea that these are inventories levels which define above difference in equity returns.
At the same time the connection is in the opposite direction: inventories grow slowly in odd years vs. even years. This could be interpreted as during years with high economic growth inventories sell out fast and levels are low while when economic growth slows down inventories grow.
ApplicationThese findings suggest the following strategy: buy and hold during odd years (buy Dec 31 even year – sell Dec 31 odd year) and stay out of the market in even. This way historical data assumes that you will get 11% return in the years you invest.
If you are long low frequency investor, the application of this strategy is not that simple as it might look like: where should you keep your money in even years?
OJSC Live office (ОАО Живой офис) IPO – burning questionsDate: 02 Jul 2013 23:30
OJSC Live Office plans to do an IPO on MICEX on July 3, 2013 (http://corporate.zhivojoffice.ru/ipo)
Live office is a B2B office products supplier in Russia - like Office Depo or Staples in the US.
One of IPO organizers is Finam known for Utinet IPO, though this time research report was written by EASTLAND Capital.
Company’s business model and financials raises several fundamental questions so I would not do a full-valuation and rather focus on these questions.
Overall investment storyIt’s growth equity investment at a supposedly turnaround point.
Current trends looks scary:
- EBITDA declines for at least the 2nd year in a row (2011, 2012) and we have not seen reports before 2010!
- EBITDA margin achieved 0.2% in 2012
The company plans to get 129 RUB * 4m shares=516m RUB to invest in working capital and CAPEX. The company is sincere that in 2013 situation will deteriorate and EBIT will go to negative zone. But suddenly in 2014
- Revenue will almost double
- EBITDA margin will increase from 0.5% to 5.9%
Can this happen on a …
- B2B market (=slow switching)
- Very competitive and price-sensitive market
- Market growing a bit faster than inflation: 10% a year
? The answer is hardly.
EBITDA Margin is not expected above 9% with 2-6% as a realistic targetHistorical EBITDA for 2010-2012 was never higher than 0.8%. The company forecasts sudden increase to 10.3% in 2014 and 13.2% in 2017. Is it realistic?
Live Office P&L history and forecast
Benchmarks given by EASTLAND Capital says no. Here is EBITDA Margin for all DM benchmarks and one EM benchmark (will discuss later why other from EM are not relevant benchmarks).
EBITDA Margin benchmarks - office suppliers
After 2008 crisis EBITDA Margin none of the benchmark companies went above 9%. It was in 2-9% corridor which suggests that a company like Live Office which is not a market leader should assume to achieve 5-6% maximum.
Looking at historical numbers 2%-6% can be considered as a good outcome of planned CAPEX and marketing investments.
EM benchmarks used are almost all not very relevantJust looking at the core businesses of the proposed companies becomes clear that all except Officemate PLC could hardly be used as benchmarks due to different dynamics in their industries vs. office products supply industry.
Comparables suggested in the IPO research report
Shanghai Xinhua Media Co. – not very relevant
Shanghai Xinhua Media Co., Ltd. engages in the book publishing, newspaper operation, advertising agency, e-commerce, media investment, and logistics and distribution businesses in China. The company is also involved in the wholesale and retail of books, magazines, electric publics, and stationeries. In addition, it engages in the publishing, printing, and distribution of newspapers, journals, and magazines; wholesale, retail, and leasing of video and audio products; design, production, and issue of advertisements; trading business; property management business; and provision of economic trading consulting services, as well as warehousing and delivery services. The company operates 200 bookstores. Shanghai Xinhua Media Co., Ltd. was formerly known as Hualian Supermarket Holdings Co., Ltd. The company is headquartered in Shanghai, China.
Jarir Marketing Company (Jarir) – not very relevant
The company is offering a wide range of products including school & office stationeries/supplies, education aids & books, PCs & laptops, PCs & laptop accessories, digital electronics & video games and smart phones & PC tablet. According to the given information, the company has strong relationships with worldwide leading brands and companies particularly in PCs segment. Moreover, Jarir has a strong and well-diversified wholesale customer base, which includes oil companies, banks, government and health care.
Gestetner, Sri Lanka – not very relevant
Gestetner of Ceylon is the sole distributor of Gestetner brand B&W and colour photocopying machines in Sri Lanka. In addition the Company is the authorized distributor of the prestigious brand of Fujitsu Laptops and Daito stencil duplicators.
The Company is a leading provider of Total Document Solutions in Sri Lanka making available cutting edge IT based hardware and software solutions. The document life cycle combined with a range of business and professional services are also provided to our customers.
Office Equipment PLC – not very relevant
Office Equipment PLC engages in the import, distribution, and maintenance of office equipment in Sri Lanka. Its products include note counting machines, coin counting machines, time recorders, and currency sorting systems. The company is based in Colombo, Sri Lanka.
Officemate PLC - ok
Officemate Public Company Limited supplies office products through printed and online catalogues in Thailand. Its products comprise writing and correction, office stationery, glue, tape, packing, filing, storage, conference presentation, beverage, canteen, and cleaning products, as well as furniture, ink and toners, computer supplies, papers, books, envelopes, business machines, electronics, and factory products. The company is based in Bangkok, Thailand.
EV/Sales for Officemate PLC was too high for 2012 (4.0x) due to reverse merger and is not representative. So 2013 EV/Sales for EM would be 0.6x vs. 1.16x which will considerably decrease multiples valuation.
Leaving only Officemate PLC as an only comp will considerably decrease multiples valuation in 2012-13.
Investments in working capital didn’t work that efficiently in the pastIn 2012 working capital grew 90.7m RUB while revenue grew 35% (203m RUB).
If the company invests ~350m RUB in working capital in 2013-15, would it help to grow the revenue on 3,857m RUB? Probably not, even not close to that.
To conclude, IPO research by EASTLAND Capital has several unjustified assumptions which are critical for valuation. If they are corrected, resulted valuation would probably hardly justify the proposed IPO price, not to mention required equity upside.
Tattelecom – Russian Value Trap with 80% upsideDate: 23 Mar 2013
Tattelecom (JCS Tattelecom, TTLK): fixed line telecom operator in Russia. Fundamentals are appealing:
1. Revenue forecast – below inflation growth from fixed line telephony and broadband internetTattelecom is a fixed line telecom provider in Tatarstan – one of Russia’s regions with 3.8m population and 75.9% urban citizens.
Tattelecom on 27 Apr 2012 expanded to mobile market: it became an MVNO using infrastructure of Smarts – mobile operator from Samara. As Tattelecom is just at the beginning of its way to mobile, it’s difficult to estimate mobile influence on revenue, margin and CAPEX. In this analysis
- it’s assumed that the mobile segment will generate average return on capital
- mobile revenue and related CAPEX are not modeled
1.1 Fixed line telephony market – slow ARPU growth with slow subscribers declineTattelecom was formed as a fixed line telephony operator and continues in this way: 54% of 2011 revenue came from fixed line telephony. Fixed line telephony is a declining market by number of subscribers. How fast will the decline happen and will it be compensated by ARPU growth?
To analyze that I looked at fixed line telephony data for the biggest telecom operators WW. They usually have dominating market shares in their respective countries and thus changes in their revenue, subscribers and ARPU approximate market behavior.
Fixed line telephony subscribers, APRU and revenue change for top operators WW
Source: Capital IQ
Note: the difference between the speeds of subscriber decline for Business and Residential segments are not very different for benchmarks: 1-2%, so the difference in the mix doesn’t cause material differences between companies.
The best and the only Russian benchmark for regional fixed line telecom services is Rostelecom. Its data shows accelerating decline speeds in number of subscribers.
Rostelecom fixed line telephony: subscribers and ARPU growth
Rostelecom – fast ARPU growth with fast subscribers decline strategy:
1.2 Fixed broadband internet market – Tatarstan is ~4.5 years behind developed European countriesBroadband internet is rapidly developing in Tatarstan – penetration is only 51%. The question is when this growth will stop.
Fixed broadband penetration in Tatarstan - estimation
To analyse this I looked at the history of key European markets.
Source: World Bank, Eurostat
Based on the above data, I assume that Tatarstan is 4.5 years behind developed European markets and forecast subscriber growth as an average for two relevant years from the benchmark. For example, 2012 growth rate is an average for 2007 and 2008 growth rates.
Fixed Broadband penetration in Tatarstan - forecast
The real rate may be slower: mobile broadband and Smartphone penetrations are higher now than they were in Europe 4.5 years ago which provides considerable competition for fixed broadband.
Additional data point can be found for other regions for residential broadband internet (source: AC&C):
- Russian market grew 15% in Q3 2012 vs. Q3 2011
- Moscow (a saturated one with good organic growth prospects) grew 4% in Q3 2012 vs. Q3 2011
Russia residential broadband subscribers growth
Tattelecom fixed broadband ARPU forecasted as a slow 2% decline in 2012-2014 and stabilization to 0% since 2016 as it happened in Moscow.
1.3 Revenue forecast – from 3.7% growth in 2012 to 0.1% in 2017For both segments I assume based on historical data that Tattelecom’s market share will remain constant.
Tattelecom revenue forecast
2. EBITDA Margin – stable, no reasons to believe in improvementsTattelecom EBITDA margin (37.6% in 2011) is above average among WW fixed line telecom providers, but is almost the lowest among cable operators in Europe and US. I believe there is a clear potential to grow EBITDA margin:
- Ziggo while run by PE owners achieved 56%
- Rostelecom showed 38.4% in 2010, 39.5% in 2011
At the same time, there are no signs from Tattelecom management that they have abilities, desire and plans to do that.
Tattelecom EBITDA margin is forecasted at the same level as in 2011: 37.6%
Source: Capital IQ
EBITDA Margin of top worldwide cable operators
Source: HSBS, Ziggo, 1 May 2012
3. CAPEX – assumed at 20-22% of revenueAverage CAPEX as % of Revenue was at 23% for 2008-2012 while average data for WW comparable companies suggests 16%. 2012 showed 22% based on RAS accounting.
High CAPEX were probably attributed to the historical fast growth in broadband internet which required a lot of upfront investments. As it was assumed before, active growth in broadband penetration will continue for 2013 and 2014. I forecast CAPEX/Revenue at 22% for 2013 and 2014 (in line with 22% in 2012) and then 20%.
4. DCF Valuation: 80% upsideDCF valuation is done for 01.01.2013.
Tattelecom DCF valuation
Tattelecom DCF valuation sensitivity
Potential upsides for DCF:
+ Slower decline of fixed line telecom subscribers
+ Broadband internet growth faster than expected
- Deterioration in EBITDA margin due to wages inflation and not enough optimization
5. Russian and Global comparables: 130-180% upsideThe most relevant comps for Tattelecom are Russian telecom companies as Russian stock market overall has a big “country risk” discount.
By any of the 3 multiples Tattelecom has 130% growth potential, or more than two times cheaper.
For comparison below is a list of global benchmarks (except one outlier with 56x). The median is 5.9x which means that Tattelecom has 180% growth potential.
6. Value realization scenarios: probability is unclearHow could this huge value upside be realized? Realistically, only through change of control in the following scenarios:
7. Conclusion: it’s a convertible bondIn a nutshell we have:
+ DCF upside is 80%. Comps assume 130-180%
? Unclear prospects for value realization
This makes this stock look like a convertible bond: there are no reasons for value decline and there is a small probability for big upside in case of change of control event.
Shale gas boom in the US: Natural Gas price has become disconnected from oilDate: 21 Jul 2012
Shale gas boomShale gas is natural gas formed from being trapped within shale formations. Shale gas was first extracted as a resource in Fredonia, NY in 1821 in shallow, low-pressure fractures. ... Although shale gas has been produced for more than 100 years in the Appalachian Basin and the Illinois Basin of the United States, the wells were often marginally economical. Higher natural-gas prices in recent years and advances in hydraulic fracturing and horizontal completions have made shale-gas wells more profitable. (Wikipedia)
Shale gas production became noticeable in ~2008 and in 2010 accounted for 23% of US Natural Gas production. This was a jump unexpected by many analysts, a boom, a revolution. Source: http://www.eia.gov/forecasts/aeo/ppt/aeo2012_full.ppt
Natural Gas market is not global and flows between continents are limited by LNG capacities (which has become introduced to the market at large scales only in recent 10 years) and between countries by pipelines on the ground. Not surprisingly that due to boom of shale gas US natural gas price became much lower than in other continents. Source: BP (http://www.bp.com/.../Natural_gas_slidepack_2012.pptx)
US natural gas price disconnected from oilNatural gas prices were following oil prices for decades and it was considered to be a common wisdom. But US shale gas boom changed it on one continent. Take a look at the charts below. Source: US DoE (http://wikiposit.org/uid?DOE.RWTC), Federal Reserve Bank of St. Louis
(http://research.stlouisfed.org/fred2/series/GASPRICE/downloaddata?cid=32217), author's analysis Source: BP (http://www.bp.com/sectiongenericarticle800.do?categoryId=9037181&contentId=7068643), author's analysis
This change is so dramatic and unexpected that broader public still is not aware about it or doesn’t recognize the consequences.
Consequences of decreasing natural gas vs. oil pricesLong term consequences of shale gas revolution and decreasing natural gas price vs. oil price are multifold.
1) Negative push to oil price. If US shale gas production continues to grow and its prices are lower than the prices for other sources of natural gas, natural gas will substitute oil in several industries in the US.
As oil supply is integrated globally and oil price is global, decrease of oil demand in the US will cause downward push to oil price. This in turn can have numerous consequences, the most obvious of them pointed out below.
2) Value creation in many US industries Many US industries will directly benefit from cheaper natural gas price costs. Examples are:
3) Move of economic and political power to countries with growing shale gas production.
Shale gas boom can happen in other regions of the world. April 2011 EIA report found shale gas reserves across the world with China having the biggest reserves WW. To be balanced, "Russia and Central Asia, Middle East, South East Asia, and Central Africa were not addressed by the current report. This was primarily because there was either significant quantities of conventional natural gas reserves noted to be in place (i.e., Russia and the Middle East), or because of a general lack of information to carry out even an initial assessment. In addition, certain limitations in scope reflected funding constraints." (http://www.eia.gov/analysis/studies/worldshalegas/).
If shale gas reserves estimations in the report is true, courtiers possessing them and being able to start their profitable exploration would get economic and political power from traditional natural gas producers and suppliers, key of whom are Russia and Middle East.
The small but direct result of falling US natural gas prices will be US natural gas importers (Trinidad & Tobago and Peru are the largest) will continue to lose volumes, margins and consequently economic power in the region.
4) Shale oil can also become true. Prospects of shale oil are much less clear and they deserve a separate post. What is known is shale oil does exist and one day one big country may start producing noticeable volumes of shale oil at prices cheaper than global oil price. This will change the world order built in XX century forever.
K-cycles or Kondratieff cycles – we are in economic WinterDate: 29 Jun 2012 23:00
K-cycles is a theory which is remembered during long downsides, when hopes for return of economic growth fail for several years. Now is exactly the same time.
How do k-cycles work?According to K-cycle theory, economy has long cycles of 50-60 years. Each phase of the cycle is favorable to a set of investments.
What is the length of the cycle?Scott A. Albers and Andrew L. Albers on 30 March 2012 published a serious and innovative paper "On the Mathematic Prediction of Economic and Social Crises: Toward a Harmonic Interpretation of the Kondratiev Wave" analyzing US cycles (http://mpra.ub.uni-muenchen.de/37771/1/MPRA_paper_37771.pdf). Key conclusions:
Using a range of 7-year to 18-year “spreads,” we find that this approach provides strong evidence that American economic history is composed of four 14-year quarter-cycles within a 56 year circuit in the real GNP of the United States,1869-2007. These periods correlate closely with analysis by Nickolai Kondratiev and provide a framework for predicting an annual steady state rate of growth for the United States falling between 3.4969% and 3.4995% per year.
So, US cycles are 56 years long and (by the way) the long-term US GNP growth is 3.5%. It's a fact worth to remember.
Good research of global k-cycles could be find in "A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 2008–2009 Economic Crisis", Korotayev, Andrey V and Tsirel, Sergey V (http://escholarship.org/uc/item/9jv108xp). Key conclusions:
Our spectral analysis has detected the presence of Kondratieff waves (their period equals approximately 52–53 years) in the world GDP dynamics for the 1870–2007 period.
So, global k-cycle is 52-53 years.
Where are we in the current k-cycle?This is the most interesting question. All the sources I saw tell that:
Source: Masaaki Hirooka, Nonlinear dynamism of innovation and business cycles, 2003
One more opinion from Evan Gilbert, Head of MitonOptimal Asset Consulting, 26 January 2012: Where are we now? We believe that some emerging market economies (China, India, SA and Australia) lie in the Autumn phase – at about two o’clock. While prices of almost all assets rise in this environment, the future is not rosy – winter is coming as debt levels start to build in these apparently benign conditions. Developed markets have been suffering through winter in the last four years and it’s not quite over yet – we see them at around 5 o’clock. We expect them to move into the Spring phase in the next ten years. This is the basis for our increased allocation to equities, and decreased allocation to bonds. Our strategic positioning is fundamentally for Spring, but we are also very conscious of the onset of Winter in emerging markets – that’s what’s going to guide our tactical allocations.
Application of K-cycles theoryThe theory never became widely used due to several problems:
1) Hard to find an indicator which follow at least 2-3 k-cycles (110-165 years)
2) Today any country's' economy experiences a combination of several k-waves.
K-cycle theory is good to explain long waves in one economy – like US or Europe. Before 1990s when the world was not so globalised as it's now it was possible to apply the theory to these economies. I believe it would work well in a totally globalized world. But now we are in the transition period from partly integrated world to a fully global world.
That means any economy experience a combination of k-waves: local one and several from outside, coming mostly from the biggest trading or investment partners. For example, China experiences a superposition or combination of a Chinese k-wave, US k-wave and probably European k-wave. One more complication to the analysis is that as China becomes more oriented on internal demand, Chinese k-wave becomes more important than US and European.
History: Nikolai KondratievNikolai Kondratiev died in 1938 in the Russian Gulag. Kondratiev was a Russian agriculture economist who, while working on a five-year plan for the development of Soviet agriculture, published his first book, The Major Economic Cycles, in 1925. Over the following years he carried out more research during visits to Britain, Germany, Canada and the United States.
In his book and in a series of other publications he outlined what later became known as “Kondratiev Waves”. These were observations of a series of supercycles, long surges, K-Waves or long economic cycles of alternating booms and depressions or of periods of strong growth offset by periods of slow growth in capitalist societies. These waves or cycles were at the time calculated to last from 50 to 60 years, or roughly a human lifetime in those days.
Kondratiev applied his theories to capitalist societies, most notably to the US from the time of the American Revolution. His undoing came in 1928 when he published his Study of Business Activity in the Soviet Union that came to much the same cycle conclusions for the Soviet economy that he had noted for capitalist societies. He fell out of favour with Josef Stalin, who saw his treatise as criticism. Kondratiev was arrested and following a series of trials he was banished to the Gulag, where he died.
Abrau Durso – 48% upside with "Champagne"Date: 08 Jun 2012
Abrau Durso (JSC Abrau Durso, MICEX:ABRD) started to trade at MICEX-RTS on 11 April 2012 to "test" investor interest. So, let's test our interest.
The intrigue of the stock is that it's very cheap comparable to multiples from other emerging markets… except Russia.
EV/2011E EBITDA = 5.9x
What about DCF valuation?
My target price is 8,167 RUB which is 48% to 08.06.2012 close price at 5,501 RUB.
1. Russian Vine Market and RevenueWe will use the following model: Revenue = Volume * Price
Assumed macro context: slowdown of Russian GDP growth from ~7% in 2001-2007 to ~4% in 2011-2016
1.1 Russian sparkling vine marketIn April 2012 presentation the company makes the claim that wine market in Russia will grow fast to catch up with European penetration. I don't support this.
Is there potential fast growth in vine consumption in Russia? No, but there is potential upside
The claims that it would grow with GDP to catch up with developed European countries is questionable:
A lot of researchers assume an upside which is a good upside to have for a stock. This is one of the best papers on the topic: http://www.sostav.ru/articles/2003/02/03/prod030203/
Is there potential fast growth in penetration of sparkling vines to vine market? No
1) Russia already has the 2nd highest penetration among ~50 top countries.
2) Penetration of sparkling vines to wines showed no particular trend since 2006
So, expected growth of Russian sparkling wine market is well defined by its history: 2.2%
1.2 Abrau Durso Market shareAbrau Durso was aggressively gaining market share in 2008, 2010, 2011. Loss of market share in 2009 is well explained with 31% price increase vs. 17% CAGR in 2006-2008 and 14% CAGR in 2009-2011
The company didn't do any acquisition in 2009-2010 of production assets: the only acquisition was the following: "On 22 May 2009 the Group acquired 100% of the trading company LLC Atrium with the aim to create the distribution network within the Group."
I believe that the company will continue market share growth at 13% rate (CAGR 2006-2011): with 2011 market share of 4.9% there is enough space to grow.
1.3 Abrau Durso Price increasePrice increase was the biggest driver of revenue in Abrau Durso business model: prices grew at 18.6% CAGR in 2006-2011.
Part of this price increase was driven by growing penetration of the more expensive Classical champaign: it contributed 2.5% to price CAGR in 2009-2011. This contribution is forecasted to decrease to 1.3% in 2011-2014.
Note: there is an inconsistency in share of classical champaign at page 15 of the presentation and operational report (http://abraudurso.ru/upload/news/OperateReport5th.xls)
Price CAGR decreased from 17% before 2008 crisis to 14% after (-3% change). It's defined by several effects: inflation, duties, currency rates and share of imported vs. local wines. The last one is hard to take into account due to lack of data.
I would expect price growth to experience the same slowdown in the coming years due to increased competition.
Price CAGR forecast 2011-2016: 10% (11% rate before taking into account effect of slower growth of Classical champaign or 10% after)
1.4 Revenue forecastVolume growth: 2% + 13% = 15%
Price growth: 10%
Revenue growth: 25%
Company's forecast: 34m bottles in 2015, which is 21% CAGR
2. EBITDAIn 2010 Gross Margin showed improvement, but SG&A increased due to G&A expenses growth. In 2011 EBITDA margin increased on 5.3% which is quite big and is potentially caused by preparation to IPO. Unfortunately there is no explanation for this change. Also, 2011 EBITDA margin is already on high levels – 32.6%.
To base projections on 2009-2010 data where all costs splits are provided, it's assumed:
3.1 Working capital (WC)The company showed good progress in 2010 vs. 2011 in improving its working capital components. Remy Cointreau shows that turnover of Receivables and Payables can achieve much more attractive levels.
WC projections assume 1% p.a. decrease in Inventories + Receivables turnover as % of revenue and 1% p.a. increase in Trade and other payables turnover as % of COGS.
3.2 CAPEX2010 CAPEX as % of next year revenue change is 22%. For CAPEX forecast 30% is used.
4. DCF ValuationIFRS report is available only for 2010, and debt and cash are given at the end for 2010. So all valuation will be done for the end of 2011, including FCFF for 2011 at 0% discount rate.
4.1 Acquisition of CJSC Abrau-DursoOne of the biggest complications of DCF valuation is acquisition of 41.2% of CJSC Abrau Durso on 22.07.2011 (http://www.e-disclosure.ru/portal/event.aspx?EventId=lVzZvlVYn0a0VuIkxKrhKQ-B-B).
"As a result of this transaction the Group’s share in CJSC "Abrau-Durso", JSC "Wine atelier Abrau-Durso", Fund for the revival of traditions of winemaking "Heritage of Abrau-Durso", "Service Abrau-Durso Limited", LLC "Abrau-Durso territory", Vine Yards Abrau-Durso Limited, LLC Abrau-Durso Public Utilities, CJSC Vino ER EF, LLC Center of Wine Tourism Abrau-Durso increased to 100%."
According to the prospect dated 18.11.2011, the company owns 99.999%-100% in all dependent companies. As no major M&A transactions happened since that time non-controlling interest is effectively 0 as of now. How to value this non-controlling interest at the end of 2010? To answer this question let's see how that deal was financed:
4.2 DCF Valuation
5. ConclusionAt current assumptions upside is 48%. Together with comparables valuation (EV/EBITDA 2011E at 5.3x vs. 8.4x in developed and 14.1x in developing markets) this makes the stock very attractive.
EPAM IPO was priced at $12, my valuation was $12.2 (Wow!)Date: 09 Feb 2012
EPAM did IPO at 25% below planned IPO range – at $12. Surprisingly enough, my valuation was at $12.2!
Post with EMAP valuation
Tue Feb 7, 2012 8:46pm EST: The company, which provides IT services focused on software product development, sold 6 million shares at $12 each in its IPO. It had expected to sell $7.4 million shares at $16 to $18 apiece. (Source)
Those who may question the dates in the blog can see my message at seekingalpha.com in comments made at 7 Feb, 02:24 PM EST:
EPAM – another overpriced technology IPO?Date: 06 Feb 2012 23:00
EPAM IPO is scheduled for 7 February 2012 with the IPO price range at $16-18.
The result of my DCF model is $12.2 which is -24% of the lower IPO border.
Here is the prospectus: EPAM IPO S-1 Amendment No. 6
Since IPO of Yandex on 24 May 2011 on NASDAQ its shares fell ~45% while NASDAQ index grew on ~5% during the same period of time.
EPAM is another technology company from CIS which is about to be sold on an IPO. Is IPO price too high and the risk of Yandex fate is too probable? Here is a brief look at EPAM DCF valuation.
Revenues1) What is sustainable revenue growth rate?
Analysis of 2007-2010 growth rates shows that this is correlated to the underlying GDP growth in the countries of sales. Below is the chart showing dependency of EPAM.
Using IMF GDP forecasts as of 24 Jan 2012 and linear trend, around 50% growth for 2011-2013 should be forecasted. So there are no macro risks for revenue growth slowdown.
How sustainable is fast growth rate at 50%? Growth in 2010 was 47.9%, 1H 2011 was 66%, and growth in 9m 2011 was 59%. Those growth numbers in 2010 and 2011 are "pre-IPO" revenue increases. 2012 growth should be less. I keep it at 15% and then increase it to 30% in 2013-2016.
EBIT1) EBIT should contain two adjustments:
- Foreign exchange loss – it's a natural part of this business since 2007
+ Stock based compensation, as it is not a cash expense and later on we will add to the number of shares outstanding effects from the options outstanding calculated using treasury stock method
2) Adjusted EBIT margin jumps from 5.7% in 2008 to 11.2% in 2009 to 15.1% in 2010 to 17.5% in 2011. While I believe in the first two steps, the last two are clear "Pre-IPO" squeezes.
It can be proved by a good benchmarking. In this fast analysis I looked at Accenture:
Accenture (NYSE:ACN) EBIT Margin
Average for EPAM for 2009-2010 is 13.2%. I assume that the company will return to this level in two years.
Tax ratesHow probable is that Belarus, Hungry and Russia will continue to give the company attractive tax breaks at current level? We would assume that as soon as the company becomes bigger and public, it will be harder to get tax benefits at the same level as a % of revenue, so it's assumed that effective tax rate will go to 25%.
Other value drivers1) One of the risks stated at prospectus is: "Our agreement with one of our largest clients gives it the option to assume the operations of one of our offshore development centers, and the exercise of that option could result in a loss of future revenues and adversely affect our results of operations."
So, part of one of the offshore development centers was financed by a client and the clients can take this part and pay book value for the rest. Let's assume that if the client decides to execute this option, he will take only the part financed by him.
How big is the probability that it would happen? There is no information to judge, so it's 50%.
When can it happen? Any time between today and December 2014, so on average it would happen in 2013.
How to estimate the effect on EPAM operations? EPAM will get "de minimis price" for transferring of the offshore development center, so this will be effectively a loss of 6.1% of Revenue from 2013 with 50% probability.
2) Sell off stocks and execution of options by employees after lock-up period is over in 6m (beginning of July 2012)
This company was founded in 1993. Some of the people in the management team were waiting to cash out for 5, 10 or almost 20 years. According to the prospectus, nobody from individual or institutional owners are selling more than 18%. There is a considerable risk that they will start selling 6 months after the IPO.
ConclusionThe key questions are: in what revenue growth do you believe and what EBIT margin will the company manage to maintain? Both of them will not maintain current levels in the coming 5 years: one of them will be sacrificed to another.
What happens with stock prices of technology companies from emerging markets oversold during the IPO? They fall. Take a look at Yandex again.
EPAM DCF Model
Drivers behind inflation in VietnamDate: 27 Jan 2012
Inflation is one of the key macro economic problems in Vietnam since 2004. In 2008 it reached 23% - the highest level among main developing countries.
What drives it? As usual, there are a lot of opinions without any serious analytical support. In contrast to them I just found an article which uses vector auto-regression (VAR) to decouple effects of the inflation in Vietnam to supply shocks, demand shocks and monetary shocks. It's named The Causes of Recent Inflation in Vietnam: Evidence from a VAR with Sign Restrictions and written by Tuan Khai Vu from one of Japanese universities (Seikei University).
Conclusions of the modeling:
Attractiveness of emerging markets by P/E and implied return on capitalDate: 22 Jan 2012 22:33
The goal of this article is to analyze attractiveness of BRIC and Vietnam stock markets using multiples.
Country attractiveness based on P/E ratioThe multiple which is often used an indicator of investment attractiveness of individual stocks or countries is P/E. Below are its values for a key index in each country plus S&P for comparison.
Questions about the future:
Implied return on equityThinking about the questions above, everybody understands that direct comparison of P/E multiples for different stocks or countries is often incorrect as different earnings growth rates are implied. For example, expected growth for Russia in 2012 is about 3.6% while expected growth for China is 8.5%. The multiple which tries to fix this problem is PEG:
where g is taken as g*100 (for example, g=10% is used as 10). PEG multiple is even worse as it doesn't have any financial interpretation.
As P/E is widely calculated and published it's worth using it but with the correct inclusion of g in the formula:
This formula tells that if you want to compare attractiveness of stocks or countries, you should look at the implied return on equity r:
Then the question which investors should ask is whether the implied return on equity is justified, too high or too low. Below is the implied return on equity for the analyzed indices:
This leads to interesting implications:
MethodologyIn calculating implied return on equity the following assumptions were used:
AppendixBelow is P/E ratio and implied return on equity for S&P separately as the historical data is available for longer periods than for BRICs and Vietnam:
Western Europe and US: pay the debt or deflate the currencyDate: 20 Aug 2011 19:55
Market and political events and publications in the recent two weeks led me to the following thoughts about the future of Western Europe (WE) and US:
GDP growth data is from 2008 as in 2009-2010 GDP growth numbers were unrepresentative of the counties' growth potentials
Below are three publications and facts that are in line with the above views. What investments decisions do all these thoughts lead to?
Fiat currencies always end with hyperinflation and economic collapse.
WSJ, 15 Aug 2011
By DETLEV S. SCHLICHTER
Forty years ago today, U.S. President Richard Nixon closed the gold window and ushered in, for the first time in human history, a global system of unconstrained paper money under full control of the state.
It is not that prior to August 15, 1971, there was a gold standard. Far from it. Most countries had severed any direct link between their currencies and gold many years earlier. U.S. citizens were still prohibited by their own government from even holding gold privately. Nevertheless, a tenuous link to gold still existed. Under new monetary arrangements after World War II, the dollar had become the global reserve currency and central banks around the world received a guarantee from the U.S. that they could exchange their dollar reserves for gold at a fixed price. But on this day in 1971, the United States defaulted on this promise and thereby removed the last impediment to the unconstrained production of fiat money. After the "Nixon shock," money everywhere became pure paper money—or, increasingly, electronic money—that could be created by privileged money producers—banks and central banks—practically without limit.
The global paper standard has lasted 40 years but evidence is accumulating daily that its endgame is now fast approaching. The world economy is caught in a deepening financial crisis caused by excessive levels of debt, severe asset price bubbles and overextended banks—all imbalances that are the direct consequence of four decades of unprecedented fiat money creation, of artificially low interest rates and of "lender-of-last-resort" central banking. Monetary policy today—whether by the U.S. Federal Reserve, the ECB or the Bank of Japan—is not much more than an increasingly desperate attempt to postpone via super-low interest rates and periodic debt monetization the painful but unavoidable liquidation of these imbalances. This will not only ultimately prove futile, but will lead to a
complete currency catastrophe if pursued further.
Full paper money systems had existed before 1971, but only in individual countries, never on a global scale. The Chinese invented paper, ink and printing, and were the first to experiment with complete paper money systems a thousand years ago. The reason for introducing state paper money then was the same as later in Western societies: to fund growing state expenditure, usually for the purpose of waging war. Complete paper money systems are always creations of the state, never the outcome of private initiative or the free market. All paper money systems in history have, after some time, experienced growing financial instabilities, economic volatility, and an accelerating decline in money's purchasing power. All of them ultimately failed. Either the monetary authorities returned to commodity money before total collapse occurred, or they failed to do so, which then led to hyperinflation, with grave consequences for society.
Associated Press Nixon closed the gold window in 1971.
In its early history, the U.S. itself had already had these very same experiences with its own paper-money systems. The continentals, introduced to fund the Revolutionary War, led to rising inflation, and continentals finally became worthless. The greenback, introduced to fund the Civil War, also led to rising inflation—but this time a return to a gold standard was achieved before the currency collapsed. The return to unrestricted paper money 40 years ago was also in no small part motivated by wartime expenses, this time for the Vietnam War.
Most of today's macroeconomists see surprisingly little wrong with the present system of fully elastic money. This is surprising for two reasons: First, there is the universally dismal historical record of paper money systems. Second, paper money systems are inherently incompatible with capitalism. In a state paper money system, the banking system is de-facto cartelized and the banks' funding conditions and certain interest rates are determined administratively by a state agency—the central bank. The constant expansion of bank reserves constitutes an ongoing subsidy to the banks, which encourages further money creation through fractional-reserve banking. Credit growth in such an economy is no longer driven by the extent of saving in the economy but the result of central bank policy and the banks' willingness to expand their balance sheets. The continuous injection of fiat money puts downward pressure on interest rates and systematically encourages debt accumulation and investment that is funded by money printing, not by saving.
The belief among mainstream economists and central bankers today is obviously that they fully understand and can correctly anticipate the consequences of their monetary manipulations. The effects of money injections appear to them to be simply stronger growth and higher inflation, both neatly captured by the set of macro-statistics that modern economists follow so slavishly. All that central banks have to do, then, is target the right balance between the two. A display of such intellectual hubris was given by Federal Reserve Chairman Ben Bernanke when he explained the Fed's policy of quantitative easing to the U.S. public in an op-ed last November. Extolling the advantages of artificially depressed interest rates and propped up asset prices courtesy of the Fed's printing press, Chairman Bernanke promised that, "lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
One wonders why we even need markets, if the Fed chairman and his committee know where mortgage rates, corporate borrowing rates and stock prices should be, how much debt U.S. households and corporations should carry, and what the "correct" funding cost for the government is.
Forty years of persistent monetary interventionism have left the economy addicted to cheap credit and continuous asset inflation. Forty years of monetary expansionism have led to distorted prices, misdirected economic activity and unsustainable debt levels. Since Lehman Brothers we know that the accumulated imbalances have become so momentous that a market-driven liquidation of them is deemed politically unacceptable. Credit correction, debt deflation and liquidation—as much as the market is craving them to cleanse the economy of its dislocations—will not be allowed under any circumstances.
The central banks are now boxed in. There is no exit strategy.Low interest rates and further credit growth must be sustained at all cost, and as the private sector becomes reluctant to participate, the state is increasingly the "borrower of last resort" to the central bank's "lender of last resort." The Fed will engage in QE3, then in QE4. After mortgage-backed securities and Treasuries, it will be corporate bonds, auto loans and credit card debt that will also end up on the central bank's balance sheet—and, of course, more Treasurys. The ECB will continue to accumulate the ever-growing debt of European sovereigns. But when the public realizes that the mirage of solvency is only being maintained by ever-faster money creation, the confidence in the state's paper money will evaporate quickly.
Historically, all paper money systems ended either in complete collapse or a timely return to hard commodity money.
Forty years after the start of the present paper money episode, we are facing the same choice.
Mr. Schlichter's book, "Paper Money Collapse—The Folly of Elastic Money and the Coming Monetary Breakdown," will be published by John Wiley & Sons next month.
2) Asian Currencies Get New Respect Amid Turmoil
WSJ, 15 Aug 2011
Associated Press Nixon closed the gold window in 1971.
3) Hedge fund to bet against west
THE FINANCIAL TIMES, Posted: Saturday, Aug 06, 2011 at 0223 hrs IST
By Sam Jones, Hedge Fund Correspondent
Lee Robinson, the outspoken founder of London hedge fund Trafalgar Asset Managers and former senior Tudor Investment Corporation trader, is preparing the launch of a hedge fund to profit from the devaluation and collapse of western economies.
Mr Robinson has already begun marketing his Altana Sovereign Diversity Fund to investors. The fund is positioned to take advantage of the devaluation of the dollar and “stealth defaults” of developed countries, reflecting Mr Robinson’s long-held bearish views on the prospects for the global economy.
Marketing materials for the fund seen by the Financial Times identify France, Germany, Italy, Spain, the UK and the US as countries that it will be positioned against.
The fund is designed to “profit from the global secular wealth shift from debtor to saver nations”, the presentation says.
“Based on the increase in the quantity of paper money, wealth may fall 30-60 per cent. This trend would likely take generations to reverse,” it adds.
Mr Robinson quotes economist John Maynard Keynes on the frontispiece of the confidential presentation, which has been discreetly distributed to potential investors: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
A prototype version of the strategy has returned 3 per cent since inception in October, before fees.
As well as taking long-term positions against western economies, the fund will take advantage of short-term currency trends and invest opportunistically in a range of financial instruments to “enhance returns”.
Altana’s launch has already had its fair share of attention.
Mr Robinson’s decision to set up a new hedge fund firm precipitated a dispute between himself and his former partners at Trafalgar, Theo Phanos and Goldman Sachs.
Via its Petershill investment fund, Goldman owns a 20 per cent stake in Trafalgar that has dropped in value following Mr Robinson’s decision to step back from the firm, which specialised in trading around European corporate events such as mergers and bankruptcies.
Trafalgar’s flagship Catalyst fund, which Mr Robinson managed, was pushed into liquidation by its directors because of his departure.
Negotiations are understood to be under way over the possibility of Goldman taking a successor stake in Altana.
Mr Robinson has nevertheless pressed ahead with his fundraising drive and has invested more than $25m himself.
He has also been on a hiring spree.
Altana has recruited Ian Gunner, the former head of foreign exchange research at BNY Mellon, to be a fund manager and Antony Lingard, a senior banker at UBS’s prime brokerage division, to be chief operating officer.
Mr Robinson was unavailable for comment.
Here is the information about the fund from its official page:
To profit from the appreciation of currencies of stronger sovereign credits and to protect investors’ wealth from the stealth defaults of debtor nations.
Invest in diversified portfolio of short-dated sovereign credit instruments, whose currencies are expected to strengthen against the US$ and other traditional reserve currencies (£,€,Y). Favoured currencies to reflect relative strength in public finances, the domestic financial system and the balance of payments.
Avoid nations at risk of default/restructuring.
Enhance returns by taking advantage of short-term currency trends to actively trade around the long-term positions of the portfolio and investing in other instruments such as gold.
Russia showed the fastest capitalization growth since the bottom in 2002 up to 2010: 42% CAGRDate: 30 Jul 2011
To continue the topic from January 5, 2011 that in 2000-2009 Russian $ (nominal) GDP grew on the fastest rate than GDP of other BRICs here is similar analysis but now about capitalization of major exchanges.
Russia showed the fastest capitalization growth since the bottom of the market in 2002 up to 2010: 42% CAGR. India was the second with 39%.
Source for this and below charts: http://www.world-exchanges.org/statistics/time-series/value-share-trading
The reason I selected the period since 2002 is that 2002 was the year with local minimum in WW capitalization. 2008 was not used for this as I wanted to capture capitalization growth on a longer timeframe.
Russia showed this growth mostly due to two big jumps in 2006 and 2007. China, India and Brazil showed just one jump in 2007. This means that in 2005 Russia was much more undervalued than the other three countries.
This picture brings the idea that for each of the key developed and emerging markets there was a several year period with extraordinary growth in capitalization. This phenomena is better to observe on a moving average charts as annual growth rates are very volatile. Below is the chart for the 3-year moving average capitalization growth rates. For example this 3 year moving average helps to eliminate the huge drop in 2008 and see the dynamics form a more distant perspective.
This data combined with other external (to this analysis) thoughts bring a hypothesis that developed markets and China have already passed their periods of fast market appreciation. Russia, Brazil and India have some hope, but the capitalization growth is not certain. Who will be the next tiger in these charts for 2011-2020? It should be a country with the highest unexpected GDP growth.
Platforma Utinet.ru IPO. 110x EV/EBITDA, 157x P/E – Finam's valuation tricksDate: 20 Jul 2011 19:57
Key valuation assumption: revenue growth projections from Finam are correct. If they are decreased, valuation will be much lower.
Today (20.07.2011) Finam did an IPO of JCS Platforma Utinet.ru. This is a good event from several dimensions:
Investor Presentation, 2009&2010 IFRS reports and Finam research report are here: http://www.finam.ru/investments/promo00008/default.asp
This research report is awesome. Just take a look at the chart below.
Finam recommends investing in Uninet.ru with a valuation in mind of 110x EV/EBITDA and 157x P/E:
1. EBITDA forecastRevenue grows at 70% CAGR in 2011-2015. It's too questionable, but let's assumes that this is a good enough forecast. The company goes from -5% EBITDA margin in 2009 to 10% in 2015. Why?
General comment: the company cut many expenses in 2010 to get a high EBITDA in 2010 (pre-IPO year), so I almost don't take 2010 numbers into account as this level of costs is obviously pre-IPO manipulation and is not sustainable.
1.1 Gross MarginIf we adjust for high Gross Margin for "Platforma" business (assuming 30% in 2010 and taking 57% in 2015 from Finam report), we will get that Gross margin for own trading business grows from 7%, 5% and 10% in 2008-2010 to 13% in 2015. The growth of discounts from laptop distributors should explain this growth. But there are three counter arguments:
1.2 Marketing ExpensesBenchmarks: Marketing Expences as a % of revenue are declining from 6.0% in 2009 to 0.3% in 2015. This is unsustainable and in the long term will lead to market share loss. Below is the comparable data for all the companies WW in Internet Retail Industry with data for Advertising Expense available. Average: 9.8% of revenue. Amazon has 2.4%. Source: Capital IQ
Company plans: "Согласно инвестиционной программе «Ютинета», до 70% привлеченного в результате IPO капитала пойдет на продвижение бренда «Ютинет»." (http://www.rbcdaily.ru/2011/07/13/media/562949980627656).
How is this ambitions brand promotion plan consistent with decrease in Marketing Expenses as a % of revenue?
My adjustment: keep Marketing Expense at 2009 level of 6%
1.3 EBITDAThese two adjustments lead to drastic decrease in EBITDA Forecast.
Overall conclusion: watch out for their marketing spending as % of revenue:
2. Comparables Valuation"Отметим, что аналоги из развивающихся стран обладают большим потенциалом роста продаж по сравнению с аналогами из развитых стран (ежегодные темпы роста продаж аналогов развивающихся стран в долларовом выражении в 2011-2015 гг. составляют 35-40%, в развитых странах – 24-28% по сравнению с 89%-м ростом продаж Ютинет.Ру), и оценки на основе их мультипликаторов не отражают перспектив роста, которые мы прогнозируем для Ютинет.Ру."
I assume these 24-28% growth forecasts for 2011-15 are average forecasts from many banks while 89% from Finam is an extremely optimistic forecast from one bullish bank motivated to sell shares on the IPO. For many on the discussed companies in emerging markets you can find local "Finam's" who can forecast 89% growth for them.
"Мы считаем, что данные Компании за 2011 г. не являются репрезентативными по сравнению с ожиданиями доходов на 2012 г. и далее с учетом экспансии в регионы, выхода в новые товарные категории, поэтому далее оцениваем стоимость Ютинет.Ру по средним прогнозным показателям 2011-2013 EV/EBITDA и P/E."
This phrase in bold can be applied to any of the comparables used as they are all fast growing companies.
My adjustment: If comparables' multiples are calculated based on 2011F numbers, then Utinet's equity should also be calculated based on 2011F EBITDA and Net Income.
New valuation range at Finam's EBITDA forecast: 1.3-2.3b RUR
At the same time, if EBITDA forecast from 1. is used, it will be almost impossible to use comparables as EBITDA<0 in 2011 and 2012.
3. DCFThere is one key principle of DCF method which is often misused by starting corporate finance professionals and which Finam clearly ignores in its report: DCF method requires use of market values for:
3.1 WACC – cost of debtFinam assumed 13% for cost of debt. Can Utinet.ru borrow on the open market at 13%? Obviously not and we have facts supporting that. Based on 2010 report Utinet has two external loans from AlfaBank, each at 25% rate and each with a "Related-party collateral and guarantee" which for the question discussed is an external (to the company) guaranty. That means a loan taken on the open market will have even higher rate, if any bank agrees to give it to Utinet.ru.
With EBITDA growth borrowing rate will drop, but I don't believe it will drop below 15-20% even in 2015 as the company will still operate in a very competitive and fast-changing environment.
My adjustments: cost of debt is 30% in 2011 and decreases to 15% in 2015
3.2 WACC – cost of equityInvestment in Utinet.ru is between investment in a venture (expected return on equity 50%) and a small cap public stock (15%).
My adjustment: cost of equity is 30%
CAPM could also be applied, though Finam's application of CAPM has two big mistakes:
3.3 WACCFinam used book values for Debt and Equity in their calculation of the share of debt capital.
This allowed then to increase share of debt capital which is cheaper in their model and significantly decrease WACC.
Real calculation of WACC is circular as E required for WACC and WACC required for E. That's why I would calculate here only approximate WACC, In the assumption that the company costs 1b RUR now, so share of Debt in 2011 is 0.25/1=25% and let's assume that the company will maintain this level of debt.
3.4 Working CapitalPositive change in WC is the biggest source of cash in 2011 and the second biggest in 2012. It mostly comes from growth in Accounts Payables as suppliers give 10 days credit to Utinet.
By looking at turnover, the first question is why it's jumping from 20 days in 2010 to 43 in 2011? The other question is how does this 10 days reconcile to 40 days? I don’t know well enough numbers for payment terms between electronic distributors and retailers, but would like to notice that this is very questionable and manipulative assumption to generate big positive cash flow in 2011 and 2012. One reason to explain that may be that to increase gross margin in 2010 the company agreed with suppliers to get bigger discounts and decrease financing from their terms. I would adjust this number close to 2010.
My adjustments: Accounts Payable turnover is 25 days in 2011-2015
3.5 Updated Utinet.ru DCFBelow is the model DCF built with all discussed adjustments.
Utinet.ru fair value is $1.2b RUB or 62 RUB /share.
4. SummaryFinam did so aggressive valuation for a purpose. Are real numbers so unattractive that it was the only way to attract investors for the IPO? It's hard to know the real story behind but my estimation of negative EBITDA in 2011 and 2012 tells me that Utinet.ru doesn't look attractive to most of public stocks investors.
5. Other facts
5.1 IPO Russian Sea Group (Русское Море)In April 2010 Finam did IPO of Russian Sea Group (http://www.finam.ru/investments/ipo0000B00075/default.asp). The collapse of Russian Sea stock gives insight about potential behavior of Utinet.ru stock if IPO happens at the announced price range.
5.2 What it takes to achieve high growthFinally here is a post from a blog showing how high growth is often achieved:
Исайкин Денис Сергеевич 13.10.2009 08:36 Ответить
Серёга привет, меня зовут Ден, живу в Южно-Сахалинске, ты такой умный, может подскажешь что делать? Заказал в интернет магазине utinet.ru (ООО ГлавИнформСистема) ноутбук. Прислали модель ту которую заказывал, НО конфигурацию урезанную, которая стоит гораздо дешевле. Переговоры по телефону, а так же переписка по мылу ничего не дали. В ОЗПП сказали написать официальную претензию. Написал на директора Уколова. Вернулось письмо с пометкой, что такой организации по такому адресу не существует. Что делать? Вообще, существует ли справедливость?:( Редиски, обманывают народ и это постоянно сходит им с рук:(
Optogan – another bulb story?Date: 25 May 2011
Optogan (http://optogan.com/) is a private company which works under the slogan “Lightning the 21st century”. Mikhail Prokhorov owns 50%+1 share together with management. If you go to their website you will hear a brave music symbolizing fight and victory. Let’s look at this company from investors’ point of view...
Just looked at this company from investor’s point of view and two questions attracted my attention:
1) How big is the market for LED lamps (one of Optogan’s products)?
a) “Мировой рынок светодиодов оценивается примерно в 10 млрд долларов. В прошлом году он вырос вдвое. Российский рынок светодиодов в 2010 году составил примерно 20 млн долларов. Однако, по оценке руководителей "Оптогана", к 2015 году внутреннее потребление светодиодов в России может увеличиться тысячекратно - до 20 млрд долларов! Такого масштаба рынок светодиодов может достичь с учетом перевода всей ныне действующей техники на светодиодные технологии.”
We heard this story before. To replace a cheap product with an expensive one, whatever the return of this investment is, is just difficult. One company already tried to do exactly that. It was in 1986 in US, the country where managers are the most attentive to economic efficiency in the world. DioLight put to US market a lamp with a diode inside the bulb in mid 80s.
“It costs DioLight Technology Inc. to make a bulb that retails for $4.99 and lasts, on average, 6 years and 10 months if burned continuously, 50 years if used only two or three hours per day. DioLight's bulb costs the customer less than seven times as much to buy as GE's, yet it burns 60 times as long.”
The article is about that it was dam hard to sell these lamps. It looks like the company didn’t become very successful as we don’t know it. May be it managed to become a niche product supplier: their lamps “made sense for hard-to-reach places where changing a bulb was difficult and therefore costly. And they were good where aesthetics were important -- in signs or chandeliers, for example, where a dead bulb detracts”.
b) Upfront analysis leads to the same conclusion that this product can be only a niche product. “Crack the case” book by Marc Cosentino, the best book to prepare for strategy consulting case interviews, has the following case:
“GE has invented a new light bulb that never burns out. It could burn for more than 500 years and it would never blink. The director of marketing calls you into her office and asks, "How would you price this?" What do you tell her?”
The recommended answer comes to that regular GE bulbs are the most economical as if all of them replaced by bulbs that last for 50 years, the market would collapse in the long term. People will no longer need bulbs in the quantities closed to historical levels. The recommendation for GE is to make it very expensive and sell for areas where replacement is very costly while cost of bulbs doesn’t matter.
Допустим, мы - я, Вы и Хроноскопист летели на самолете через Тихий океан. В пути мы втроем накушались абсента, надебоширили, отломали дверь от туалета, и нас за это выкинули в море через аварийный выход. По счастью, рядом с местом нашего падения обнаружился маленький безымянный полинезийский остров.
2) Can Optogan be competitive?
“Глобальные игроки занялись выращиванием светодиодов и чипов много лет назад. Чтобы довести качество продукции до международного уровня, нужно пять-семь лет",— говорит генеральный менеджер Philips "Световые решения" в России, Белоруссии, на Украине, Кавказе и в Средней Азии Владимир Габриелян. У того же Philips Lighting на светодиоды уже сейчас приходится 7% оборота — свыше 450 млн евро. Через пять лет компания собирается довести их долю в выручке до 50%. Только на покупку четырех светодиодных компаний за последние десять лет голландцы потратили около 2 млрд евро”.
http://www.kommersant.ru/doc/1475624 (Журнал "Коммерсантъ Секрет Фирмы", №8 (300), 09.08.2010)
Phillips, one of the world’s most experienced companies in electronic and bulb industry invested years and billions of EUR in this technology.
“Участники рынка пророчат бум бытового LED-рынка примерно через пять лет, когда цена светодиодной лампы сравняется со стоимостью компактной люминесцентной. Максим Одноблюдов рассчитывает, что продукция его компании к тому моменту будет стоить примерно на 10% меньше, чем у глобальных конкурентов, при сопоставимом качестве.
Откуда у "Оптогана" возьмутся низкие цены? По словам Одноблюдова, за счет технологических ноу-хау и наращивания объемов производства”.
(the same source)
I don’t believe that Optogan can have better scale then Phillips, or if it does the investments to reach it would not be economically feasible.
The only chance for Optogan to generate IRR comparable to competitors is that mentioned know-how. Is it really that good?
To summary this brief market and competitive analysis:
- Market size (at least for LED lamps) will probably be lower than expected. History of DioLight in 1986 showed that to squeeze out traditional bulbs is almost impossible as they are very cheap. Calculations prove that even if that happens, market will collapse in the long term
- Competitors are way ahead in experience curve
+ Optogan’s innovative technology can lead to cost leadership
I would not invest in Optogan now based on this risk and return profile.
Russia is the fourth attractive country by PEG ratio after China, India and SingaporeDate: 05 Mar 2011
To continue on my January post about P/E for countries, here is the data for PEG. PEG is a better indicator of country attractiveness as it adjusts for growth. Like you can see Russia is only fourth one, but better than India.
Another interesting outcome is that US is the most attractive among all developed countries after Sweden.
It should be noted that PEG in this table is not PEG precisely as their calculation has methodological mistake. They used Real GDP growth while they should have used Nominal GDP growth.
--- From Seekingalpha ---
Yesterday we highlighted the stocks in the Russell 1,000 with the lowest PEG ratios. Today we take a look at a different PEG ratio analysis. A few years ago we decided to use the PEG ratio to analyze country valuations. To do this, we use the P/E ratio of the country's most widely followed equity market index and the country's estimated GDP growth for the current year. Just like with stocks, the lower the better for country PEG ratios.
Below is a list of PEG ratios for 22 countries. As shown, China tops the list with the best country PEG ratio at 1.94. It is followed very closely by India at 1.95. Both China and India have higher than average P/E ratios, but their GDP growth more than makes up for it at 9.50% and 8.50%, respectively. Singapore and Russia, which rank 3rd and 4th, get to their low PEGs by having much lower than average P/E ratios and slightly better than averaged estimated GDP growth. Spain, on the other hand, has a P/E ratio similar to Singapore and Russia, but its expected GDP growth is so low at 0.60% that it has the highest PEG ratio of all the countries shown. Someone looking at just the P/E ratios for Spain, Singapore and Russia would see a similar valuation, so this is a good example of where the country PEG ratio can help identify the more attractive country/countries.
For those wondering where the US stands in terms of PEG ratio, it's closer to the bottom of the list than the top. However, the US does have the most attractive PEG ratio of the G-7 countries. If you're looking to invest in developed nations, the US is the best place to be at least based on this valuation measure.
Russian P/E is still the most attractive among BRIICDate: 11 Jan 2011
By P/E ration Russia is still more attractive then China and Brazil and much more attractive then Indonesia and India.
It would be interesting to observe country P/E ratios in dynamics, but I am still looking for a data source to get it.
P/E per country as of 11 January 2011
Source: FT, from ThomsonReuters. Country P/E’s relate to a sample of stocks that cover at least 75% of eachmarkets capitalisation. † Losses are excluded fromthe P/E calculation on country indices.
The better approach would be also to observe PEG rations like here http://www.indonesianstockmarket.com/idx/country-pe-ratios-and-gdp-growth/, but again cannot find a data source for them.
Russia had the fastest nominal GDP growth in USD in 2000-2009 with China only secondDate: 05 Jan 2011
Many investors focus on real GDP growth while thinking about perceptiveness of investments to a particular country. And this is really strange approach as real GDP growth is
If you want to measure it in $, you should add change of exchange rates.
The good explanation and data for this you can find in many articles in the internet. Here I will just quote Warren Buffet made to Fortune Magazine back in November 1999 right before dot com bust:
“Let's say that GDP grows at an average 5% a year--3% real growth, which is pretty darn good, plus 2% inflation. If GDP grows at 5%, and you don't have some help from interest rates, the aggregate value of equities is not going to grow a whole lot more. Yes, you can add on a bit of return from dividends. But with stocks selling where they are today, the importance of dividends to total return is way down from what it used to be.”
The key component in this equation like Buffet mentioned is nominal GDP growth while dividends returns nowadays are small and cannot cause big differentiation. If we take a look at Nominal GDP growth in USD for 20 biggest countries (by GDP in 2009) for the period of 2000-2009, surprisingly we will find that Russia was the first one, with China only the second and India the forth. This analysis also gives insight about the country which will be on radar of EM investors soon: Indonesia. I have already seen BRIIC abbreviation.
Real vs. Nominal GDP growth for 20 biggest countries
In many GDP growth discussions Russia was not even mentioned in the last five years. Some want to exclude it from BRIC. Why were investors so inconsistent using real GDP growth which was not even close for their ultimate goal – nominal $ returns?
Let’s also see what the reasons were behind so drastic differences between real and nominal GDP growth.
Growth structure of nominal GDP in $ for top-20 countries, 2000-09
In many cases this was high inflation that secured leadership in nominal GDP growth like for Russia and Indonesia. In case of China and Euro zone countries it’s also devaluation of local currencies. It’s worth to mention that Russia was the only country out of this top-20 with negative population growth which ate 0.3% GDP growth annually.
RTS returns over year change: holidays in stocks or in cash?Date: 14 Dec 2010
It was noticed that at the end of odd years RTS delivers better returns than at the end of even years. This rule would be specifically helpful if you bear in mind that Russian stock market is closed for about 10 days during New Year holidays and the question of whether to spend them in stocks or in cash is not an easy one for investors playing on Russian stock exchanges.
I decided to check this dependency on RTS index data since 1995. Here is the result of testing returns between 1 Dec and 1 Fed and between 15 Dec and 15 Feb. It looks like on average it’s true: if you spend end of odd years in stocks you should expect to get ~15% returns vs. ~5% in even years.
Will it be true for 2010? Let’s look at market close to Feb 1.
First postDate: 12 Dec 2010
Many of my friends and colleagues liked my analysis and thoughts about investing in Russia and abroad and often ask me to send them my presentations and models. I started this blog to make information exchange easier between all of us.
This blog will be focused on investing in Russian stocks based on fundamental analysis. At the same time as markets are interrelated and investment ideas can come from unexpected areas, it will also cover Russian Private Equity and Venture Capital, stocks and bonds abroad and macro investing.