Russia: Moscow IPOs come under fire

More secondary listings likely; consumer, tech, export stocks in focus.

A trickle of new offerings of Russian equities has emerged in recent months, but bankers warn that the market will not reopen fully until western sanctions are lifted.

Andrey_Braginsky-160x186
  The  Russian economy  is doing better than
was expected

Andrey Braginsky,
Moscow Exchange

This year has seen three secondary equity sales by Russian companies and the first IPOs from the jurisdiction since the annexation of Crimea. A R9.8 billion ($172 million) block of shares in grocery chain Magnit was sold in February by its founder, Sergey Galitsky, while fellow retailer Lenta raised $225 million of new expansion capital in March. 

A second chunk of Lenta stock came to market at the end of June, when the European Bank for Reconstruction and Development sold its 3.8% stake in the company for $139.7 million.

Meanwhile, in the primary market, railcar maker United Wagon Company – known as Uniwagon – completed a R9 billion IPO in late April, while Credit Bank of Moscow made its market debut on June 30 with a R13.2 billion capital raise.

Andrey Braginsky, a board member at Moscow Exchange, says the success of these transactions – and particularly the two IPOs, both of which were done in Moscow – shows there is demand for good-quality Russian names. 

"The Russian economy is doing better than was expected, and Russian stocks are very cheap on a historical basis, so investors are starting to look at the market again," he says. "There is obviously still a cautious approach to Russia, but it is clear that investors will buy into good stories."

Equity bankers agree that well-run companies in resilient sectors, such as Magnit and Lenta, will see interest from both international and Russian investors. 

Raised eyebrows

Some are less convinced, however, of the strength of demand for firms in sectors that are currently under stress, which include banking and domestic Russian manufacturing. The IPOs of Uniwagon and Credit Bank of Moscow have therefore raised eyebrows, particularly among western bankers. 

Critics suggest the deals cannot be considered fully public, given that neither was marketed to genuine international investors – as opposed to Russian offshore money in centres such as Cyprus and Amsterdam, which counts as nonresident for equity purchases – and secondary market liquidity in both stocks has been limited. 

Rumours have circulated that the placements were mainly bought by what ECM bankers describe variously as "friends and family" and "friendly oligarchs", possibly taking advantage of recent legislation that has widened the scope of investments permissible for company pension funds.

VTB Capital, which acted as global coordinator on both deals, declined to comment. Local sources in Moscow defended the transactions, however, noting that more than 450 investors participated in Credit Bank of Moscow’s IPO and 7% of the offering went to retail buyers. The deal was also upsized during marketing from an initial target size of 10% of total share capital – the minimum requirement in Moscow – to 18.8% in response to demand.

Equity bankers say the main barrier to issuance is not demand but supply. "Since March, we have seen higher interest from international investors in quality Russian names that are expected to perform well regardless of the economic situation," says Georgy Egorov, head of emerging markets ECM at UBS. "These include retailers, export-oriented companies with good dividend yields, and internet names."

At least two of the names known to be looking to list – children’s goods store Detsky Mir, which has been targeting an IPO since before the Ukrainian crisis, and online firm Ulmart – fall into that category.

Low values

Potential issuers are, however, likely to be put off by very low valuations on Russian stocks, says Egorov. "Anything that came out of Russia right now would probably need to come at a hefty discount – and a lot of owners are still not prepared to leave too much money on the table," he says.

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Russia: special focus

Locals say that this will likely include the Russian government, despite repeated promises to list shipping company Sovcomflot in the near future. "Sovcomflot is a great company with a global business, but it is part of Russia Inc so would have to come extremely cheap," says one Moscow banker. "Policymakers might do it to prove that the market is open in spite of sanctions, but in the past they have been very price-sensitive when it comes to privatizations, so it seems unlikely."

If IPOs are likely to remain challenging, however, market participants say more secondary placements are possible before year-end. As many as six transactions are reported to be in the works, of stocks listed both in Moscow and internationally, and there are indications that at least one could come as early as September.

Braginsky at Moscow Exchange notes that these could help serve as a catalyst for primary issuance. "If secondary transactions come to market and go well, and investors make money on them, this will help to open up the floor for more IPOs," he says.

If sanctions are lifted, however, bankers say deal volumes could pick up quickly. "The opportunities and the companies are there, and if and when the top-down picture improves we could see a fairly substantial wave of issuance," says Nick Koemtzopoulos, head of emerging markets ECM at Credit Suisse.