Russia investors hope for relief with Q2 earnings

MOSCOW/PARIS Tue Aug 26, 2008 2:48pm BST

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MOSCOW/PARIS Aug 26 (Reuters) - Shell-shocked investors in Russia, where the key stock index has lost a third of its value in just three months, are hoping for a boost from a batch of earnings due from oil, steel, retail and telecoms companies.

"At some point, despite persistent tensions related to the international crisis of credit or geopolitics, investors may be tempted to return to the Russian market to take advantage of its low valuation," said Nina de Martinis, who focuses on Russia and emerging Europe at Credit Agricole Asset Management.

"The catalyst could be the publication of good quarterly performances by Russian companies in the coming months, with prospects for profit growth among the strongest in the region and within emerging markets," she said.

In the first taste of this year's second-quarter reports, Russian companies have shown profit growth of between 23 and 75 percent. Consumer-facing stocks in particular, such as mobile operator MTS (MBT.N) and food store chain Magnit (MGNT.MM), have beaten forecasts. [ID:nLQ442078]

The benchmark RTS index .IRTS has fallen nearly 38 percent from its May 19 record, as a global selloff in emerging market stocks coincided with an unexpected government attack on coal company Mechel's (MTL.N) pricing policy and with war in Georgia over breakaway South Ossetia.

As a result, Russia has been the worst performer among emerging markets this quarter and will struggle to feel the benefits of positive corporate news.

"If you took all of these companies and put them in any country other than Russia, they would be a whole lot higher," a Moscow-based fund manager said. "They (investors) like the companies but they don't like the country."

CONDITIONS FOR BOUNCE

But some market watchers say conditions exist for a market bounce.

Many investors, nursing large losses from July, have opened speculative short positions in an effort to profit from the downtrend, and are unlikely to wait if companies surprise on the upside.

"The shorts will pull the trigger if (companies) beat forecasts by one kopeck," Renaissance Capital equity strategist David Aserkoff said.

Aserkoff said investors would be watching in particular to see how well Russian companies cope with rampant inflation, with consumer prices rising an annualised 14.7 percent in July.

Magnit showed more than 90 percent growth in earnings before interest, taxes, depreciation and amortisaion on revenue growth of 50 percent, as the company drove a hard bargain with its suppliers and promoted value-added products in its shops.

Magnit and its peer X5 (PJPq.L), which is due to report on Thursday, may indirectly benefit from high inflation as shoppers switch to their "economy class" shops from more expensive -- and mostly unlisted -- luxury chains, analysts said.

New York listed juice and dairy company Wimm Bill Dann WBD.N and MTS peer Vimpelcom VIP.N also report on Thursday.

Renaissance Capital recommended investors buy LUKOIL (LKOH.MM), trading at a 37 percent discount to peers on a 2008 price/earnings basis, in the run-up to to its Friday earnings release. Its closest peer Rosneft (ROSN.MM) reports on Monday.

"We believe the past quarter was the most profitable in the history of the Russian oil industry, driven by record-high upstream and refining margins," Renaissance Capital said.

Credit Agricole's de Martinis said Russian energy companies' market valuations failed to fully reflect oil prices, even in the light of recent declines from mid-year peaks.

"These securities price a barrel of crude at $60 to $80 dollars, well below current and the average for the year, which is close to $115 barrel," she said. (Additional reporting by Maria Plis; Writing by Melissa Akin; Editing by David Holmes)