Sberbank, Bashneft: Stock-Picking Is Still Key Even Though The Market Is Cheap Overall

Sergey Ezimov presented his in-depth investment theses on Sberbank (UK International: SBER; Russia: SBER) and Bashneft (Russia: BANE) at European Investing Summit 2014.

Stock-picking is still key in Russia, even though the market is cheap overall, including against other BRIC countries: RTS Index has a trailing P/E of 5x vs. 10x for Hang Seng (as a proxy for China), 16x for Bovespa (Brazil) and 19x for the SENSEX (India). The Russian RTS Index currently trades not only at the highest discount to BRICs (~70% discount), but also to its own historical median P/E multiple of the past ten years (~33% discount). The Russian equities could be divided into: 1) state-owned/controlled: a) well managed, e.g. Sberbank; b) poorly managed, e.g. Gazprom; and 2) privately owned: a) “value” names, e.g. Bashneft; b) “expensive” names, e.g. Magnit. Two ideas:

Sberbank: leading Russian commercial bank with total assets of over $550 billion. Sberbank may be considered as a cheap proxy of the Russian equity market and the Russian economy in general. Sberbank has one of the best corporate governance and focus on shareholder’s returns among all state-owned enterprises in Russia. Ezimov mainly relies on reproduction value and earnings power value to estimate the company’s intrinsic value, with the reproduction value estimated at ~$64 billion (~70% upside). This is mainly explained by the enormous franchise value of Sberbank being the largest financial institution in Russia. The equity is mispriced mainly due to disgrace of Russia as a broad investment theme by foreign investors.

Bashneft: seventh largest oil company by production in Russia, Bashneft is a vertically integrated company with modern downstream facilities. Until recently, it has been privately owned. Bashneft has one of the best management teams in the industry which delivered $5 billion total cash returns to shareholders (dividends and buy backs) over the last five years compared to a current market cap of $4.3 billion. The company’s share price has fallen by ~60% YTD, roughly double that of the RTS Index decline, in the wake of government investigations against the chairman of Sistema, which effectively owns 74% of Bashneft. However, Bashneft and its minority shareholders are not parties to the investigation and Bashneft’s operations are unaffected. Based on earnings power value, Ezimov estimates Bashneft’s intrinsic value to be ~$15 billion.

About the instructor:

Sergey joined Wermuth Asset Management (WAM) in 2006 as an Analyst covering Russian companies in the infrastructure and utility sectors. He has also led WAM shareholder activism efforts. In a few successful cases he achieved double digit IRRs for the funds advised by WAM. After his promotion to Portfolio Adviser in 2009 Sergey was overseeing the investment activities of the Greater Europe Deep Value Fund (DVF) in the utilities universe with assets under advice up to $200 million. He has been on the board of directors of MRSK South (2009) and MRSK Urals (2010-2011); he still holds various Committee memberships at the latter. Since September 2013 he is strengthening the Moscow branch of WAM’s Private Equity team. Prior to joining WAM, Sergey had analyzed U.S. equities for a Russian family office. His native language is Russian; he is also fluent in English and speaks basic German.

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