- Net result for the period was USD 46.44 mln (January 1, 2009–September 30, 2009: 103.61). Earnings per share was USD 0.46 (1.16). Net result for the quarter was USD 45.45 mln (75.17). Earnings per share for the quarter was USD 0.45 (0.74).
- The net asset value of the company was USD 534.47 mln (December 31, 2009: 487.62) on September 30, 2010, corresponding to USD 5.29 (4.83) per share. Given a SEK/USD exchange rate of 6.7375 the values were SEK 3,600.97 mln and SEK 35.65, respectively.
- The group’s net asset value per share in USD increased by 9.60% over the period January 1, 2010–September 30, 2010. During the same period the RTS index increased by 2.30% in USD terms. During the quarter July 1, 2010–September 30, 2010 the group’s net asset value per share in USD increased by 9.37% (RTS index: 12.57%).
- The number of outstanding shares at the end of the period was 100,990,975.
- The reported net asset value per share of Vostok Nafta as of October 31, 2010 was USD 5.29 (SEK 35.42).
The company will host a telephone conference with an interactive presentation on Wednesday, November 17, 2010 at 16:00 Central European Time (CET). For call-in details, see separate press release issued Monday, November 15, 2010 at www.vostoknafta.com.
(For complete interim report see attached file)
Management report
The dismal sentiment surrounding the Russian market is evident in many different ways. The low valuation of the index is significant versus its own historical levels, versus credit spreads, versus other emerging markets. It is also visible through a series of cancelled IPO’s and capital raisings and for example on how outfits like our own company trade at historically high discounts to net asset value. Russian stories, be it corporates or funds, have not attracted any large crowds.
This sentiment, and consequently also the market, is to an extent driven by global macro (risk perception, liquidity, risk in the financial system etc) but arguably more by a set of Russia specific factors:
1. Perception of corporate governance in Russia
When meeting investors that can invest globally their unwillingness to talk about Russian equities seems first and foremost based on their perception that corporate governance abuse is so bad that it makes Russian companies un-investable. Over the past years a series of international companies have been portrayed as victims of the Russian environment (BP, Shell, Telenor, Ikea) which collectively has created the perception described above. While acknowledging that the Russian corporate environment is far from perfect it is nevertheless not much worse than most other emerging markets, especially the BRICs (short for Brazil, Russia, India and China). Also more thorough scrutiny (as usual very seldom provided by media) of the corporate situations from which the reputation of bad corporate governance is earned, reveals a more complex picture where the international companies are themselves, at least partly, to blame. All in all we believe that an underdeveloped legal system (and the subsequent risk of corporate governance abuse) is reason for a higher risk premium in emerging markets overall when compared to more developed markets (today compensated for by a superior growth outlook), but not one that justifies an undervaluation of Russia within the emerging market context.
2. Sustainability of Russian macro development
The Russian economy has rebounded strongly from the sharp contraction of early 2009 but has yet to return to the pre-crisis levels of 7-8%. There are concerns that sluggish export markets, ineffective institutions slowing the effect of Government spending and a banking system still worried about its funding and quality of their balance sheets will make the higher growth post crisis merely an inventory led catching up effect and that future years will produce low growth. From what we learn from our portfolio companies, but which can also increasingly been seen from data, is that the Russian consumer will be an important driver of growth over the coming years funded by rouble liquidity through the banking system. We also see that rouble liquidity getting the construction and infrastructure spending going again. As Russia’s export market is strongly tilted towards commodities we also see lackluster economic growth in the Western world as not a big concern for Russian macro, as demand for commodities is driven by the high growth in places like China and India.
3. Local election cycle
Russia is set for Duma (Parliamentary) elections in December 2011 and Presidential elections in March 2012. Political uncertainty ahead of these elections is sometimes given as the reason for staying away from Russian markets. Russia has over the past Parliamentary elections developed towards a two-party parliament with United Russia and Justice Party providing the typical right of centre and left of centre platforms (both with a pro-Kremlin base) essentially diminishing the importance of the once important Communist Party as well as smaller liberal factions. Duma elections will very unlikely give rise to any political uncertainty. With regards to the Presidential elections it still remains to be seen which of (or possible but unlikely both) Medvedev or Putin will run. The important factor though is that one of them will be Russia’s next President and even though Medvedev is perceived to be the market friendlier of the two, actual politics will not change much with Putin as the President. All in all we believe political uncertainty is very much a perception and one that will diminish as we get closer to the actual dates.
More importantly the ushering out of Moscow Mayor Luzhkov is a positive political development as it effectively ends one of the last remnants of the Soviet Era, a politician who remained powerful partly due to an effective handling of the country’s capital but also because of the enormous wealth this created.
Us being long term bulls on Russia we do not worry about the sentiment swings that have come and gone over the past two decades. At the moment we see contrarian bets being opened on the Russian market and believe they will be followed by a wider global as well as domestic investor audience. Although it is difficult to time the turning points we believe the combination of macro (global liquidity, oil price) and the micro described above are getting us there in the not too distant future. The current IPOs turning successful and a positive decision on continued privatization could well be the trigger that starts the next Russian rally.
Vostok portfolio
We feel the companies in our portfolio are in good shape and that the amount of upside and the roadmap to that upside is clear. With one or two exceptions all our portfolio companies are fully funded to capture these upsides.
Most recently the interest for RusForest's rights issue was indeed large which is especially encouraging in the light of the sentiment described above. RusForest now has the equity needed to capture the full potential in its historical assets through add-on investments and the removal of bottlenecks and to finance its entry into Northwest Russia through the Archangelsk based LDK-3.
Steppe Cement has carried out a rights issue which was fully taken up (we took our part) to restructure its balance sheet. The cement market typically rebounds late in the cycle and on top of that the Kazakh economy has been sluggish in its rebound mainly due to a severely battered up banking system during the crisis. As the banking system improves, so will the economy and eventually the cement market. The valuation of Steppe Cement does not reflect that outlook and hence we are buyers.
Finally, Clean Tech East will require more equity to start production of pellets in Russia (although not for some time). The formal decision of a Russia entry is yet to be taken but the upside it provides catering to the transformation of the European energy market ahead of 2020 is of a company changing magnitude. In the meantime the new management are well on track to delivering the turnaround of the existing assets in Southern Sweden. The underlying investment theme for pellets is that it produces electricity at half the price of oil, and (if one can stomach Russian risk – and we love it…) is available in industrial size. On top of this, as you all know by now, we think the price for oil is going up…
As you will find in this quarterly the format of reporting is slightly altered. The five largest holdings are presented in a concise format that we hope will capture the essence of the investments as well as a brief update since the previous quarterly. A more complete run down will as usual be available in the annual report.
November 2010,
Per Brilioth
For further information contact Per Brilioth or Robert Eriksson: tel: +46 8 545 015 50.
www.vostoknafta.com
