Market
March was the great month for Russian equities – RTS Index added about 10% and now about +15% YTD – one of the best performer across emerging markets. Oil prices continued to rebound from multi-years low on hopes that global supply glut may fade away in nearest future. Dovish FED with strong oil helps ruble – local currency appreciated against US dollar more than 9% in March. Not a lot of returns for local investors in ruble terms – Micex Index added just shy 1%.
The best performers of March was steel companies after sharp spike in steel prices (Hot-rolled coil risen from $ 270 to $ 370 per ton). After this move prices returned to levels of previous spring. I think that the main source of this move was potential shift in China economic policy – investors saw some signs of additional monetary stimulus that positive affected on industrial metal prices.
The rally was continued in Utilities – E.On Russia shown some gains after publication full-year results and guidance about repair cost of Berezovskaya GRES after accident. Company shares offer pretty dividend yield about 7% right now and more than 10% in coming years.
Other utilities shown great results versus benchmark – people continue to realize that sector lies on the bottom and can easily going higher just in case of absence supply on the market without any fundamental reason.
Portfolio performance
In March portfolio lagged to benchmark again – Fund lost about 0.4% versus Micex gained 1.7%. In 1Q portfolio added 4.9 % versus 6.2 % of Micex. The main source of underperformance YTD is Norilsk Nickel, Magnit and off course E.On.
The best performers in last month was Moscow Exchange (thanks for good FY’15 results and nice dividends announcement) and Surguneftegas preferred shares (company published annual profit that provide dividend yield more than 15%). Also as I mentioned before E.On Russia shares partially rebounded from lows after couple positive news.
The laggards of the portfolio was Novatek and Norilsk Nickel. For the first case I think that the main reason was late February news of potential permission to export natural gas to Europe. After some clarifications from State and company officials shares started to decline.
In case of Norilsk the main driver was shareholder’s agreement about dividends – sources on the market told that shareholders ready to adjust current dividend policy to market reality. Nickel prices fallen sharply last year lost about 30%. Under my estimates at current metal prices Norilsk can generate about 2.9 billion USD of EBITDA and less than 1 billion USD of Free Cash Flow which means that the floor for dividends going down from at least 2 billion USD to around 1.3 billion USD — company targeting Net Debt/EBITDA less than 2.0x. Now Norilsk trades with implied dividend yield around 7% — not so great as few years ago.
Prospects
The whole portfolio is currently trading at a P/E multiplier of 9.0Х and 6.0Х for the current year and next year respectively.
I prefer to stick to the current portfolio structure, but am always looking for new ideas.