VIC — Harvey Sawikin (Firebird Mgmt)

Russian Picks from the Value Investing Congress

By Travis Johnson, Stock Gumshoe, September 16, 2013

Harvey Sawikin is a Russia-focused investor, one of the few who has been consistently invested in Russia since it opened to foreign investors, and his suggestion is to buy Gazprom Neft (GAZ in London, GZPFY on the pink sheets), a Gazprom subsidiary that’s a better (and less liquid) value than its parent.

It’s cheap partly because it’s illiquid. It has small free float, Gazprom isn’t likely to give up more shares or take them private. There’s also a chance that Gazprom will sell Gazprom Neft their assets at bad prices — Neft has one of the best management teams, Gazprom the parent has one of the worst. To avoid confusion, the ticker for Gazprom GDRs in London is OGZD, OGZPY on the pink sheets– he does not like that company, the parent, at all.

The majority of Gazprom Neft’s revenue comes from petroleum products, only about 25% is crude oil. Even after the tax regime that reduces their profits from spiking crude oil prices being in place for five years, they’re continuing to make money — by producing more of what the government favors, like refined products (jet fuel, etc.).

They might not make money if they make mistakes, but it’s a misconception that they can’t make money under this regulatory regime … they can and they have, and they have been among the most efficient oil companies in Russia, unusual for a government controlled company.

Gazprom the parent is highly inefficient, with billions of capex wasted or stolen, but Gazprom Neft has been a highly efficient operator so it’s been kept separate. They provide a billion dollars a year (or more) in dividends to the parent. If they become inefficient, their reason for existing goes away — they provide dividends, and they receive oil licenses and are allowed to stay independent.

Transfers of reserves from Gazprom to Gazprom Neft have been at huge discounts, less than 20 cents per barrel. They’re currently valued at $1 of enterprise value per barrel of reserves, which is extraordinarily cheap, and they pay a 7% dividend.

All of the Russian oil companies are cheap, Lukoil also has it’s attractions at 4.5x earnings, but it’s also a bit more expensive and more visible.

In general, Russia is cheap — the whole country is trading at only about five times earnings. The risk in emerging markets is that the companies you can most easily buy and that dominate the mutual funds and ETFs because of their liquidity are the companies that don’t really make shareholders any money. It’s the big, bloated, state-controlled, bureaucratic or corrupt companies that make it to be liquid ADRs or dominate the indices, so buying index funds for emerging markets is the opposite of what you want to do.

What’s going on in Russia? Macro indicators are good — productivity is increasing dramatically, and demographics are improving in Russia after a long decline. The death rate has evened out and birth rates have risen, so the population is actually rising again and immigration is coming in because Russia has jobs right now. Russia is also probably the least dependent on foreign capital inflows of any of the big emerging markets, they have big foreign currency reserves now. So on the macro level Russia is actually looking pretty good.

The lower growth in the economy in Russia is largely due to needed reforms — particularly in property rights, which create long-term economic growth (that’s a big Russian weakness). In Russia, foreigners can come in with a level playing field and compete well with the locals in building an investment portfolio — you can’t say that of China or many other emerging markets.

Two bonus stocks: Tallink (TINKF on the pink sheets) — Estonian ferry operator, largest Baltic sea operator. 10X EBITDA, 5% dividend. Trades at 66% of NAV of fleet, controlled by private equity including Firebird. He thinks they have a good plan, but people ignore it because it’s Estonia.

Kazkommerzbank (KKL in London) — they’re restructuring their pension funds, PE of 3.

Sberbank (SBER in London, SBRCY on the pink sheets) is the favorite among the large cap Russian stocks — Russia is still extremely underbanked, and he says Sberbank is a well run bank. Interestingly, he thinks that they might be trying to lowball the share price before they implement a new incentive plan for management (they’re overly provisioned now).

P.S. He also shared some Book suggestions:
Thinking Fast and Slow, Daniek Kahneman
Guns, Germs and Steel, Jared Diamond.

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