The shares issued by Russia’s diamond monopoly may be bought right now, without waiting for its IPO, as expert.ru informs. But do not think that you will get a "blue chip," the online magazine says: probably the company will stay close to a solid segment of the second tier for quite a long time.
ALROSA has made another step towards obtaining the status of a public company: on July 18, its common stock (trading system ticker: alrs) was included in the indicative system of RTS Board. The difference between quotations for sale and purchase of ALROSA’s shares is now just 0.1% - an excellent result for RTS Board. Almost all the major brokers are trading the company’s shares; as they say in the forum, "the open book is filled with stocks of highly respected businesses." Yet the basic question is what the fate of these securities will be after an IPO?
Turning ALROSA a public company
Just last year, ALROSA was a closed joint stock company and any deals with its shares were difficult to make. But in April of 2011, gearing up for an IPO the company was transformed into a public corporation and trading in its securities heated up. Right now liquidity is sustained by minority shareholders, which possess about 9% of the company’s stock.
According to some reports, the brokers have long attempted to put the diamond miner’s shares onto RTS Board. However, although no formal consent of the issuer was required, ALROSA did not welcome this step. Now, in the wake of privatization of state property initiated by Dmitry Medvedev, the company has changed its position.
ALROSA may already be satisfied with its market capitalization. Today, one share of the diamond miner is sold for $26,000 apiece (bringing its capitalization to $7.1 billion), while last fall the price reached only $9,500 on the OTC market.
Our magazine has once and again described the business of ALROSA (see, for instance, "Long way to the light" in Expert No. 41, 2010) and its strong and weak points are basically well known. The strong points include the company’s leadership in diamond mining (30% of the world market and global reserves), as well as the approaching commissioning of its new mine, Udachny; while the weak points include a relatively high net debt of Rub 97.8 billion against an operating profit of Rub 27 billion in 2010; the need of substantial investments into mining and enormous social commitments. The drivers of growth for ALROSA’s stock are also known. The first one is to increase the liquidity by splitting the company’s shares. On July 25, the issue will be considered by the Supervisory Board of ALROSA. [Editor’s Note: It was considered and the decision was taken.] As a result, one share with a par value of Rub 13,502.5 will be converted into 27,005 shares with a par value of 50 kopecks. Accordingly, the new value of a single currently held share will make about one U.S. dollar. The second driver is the IPO, and the third is the growth of the diamond market.
The question of the timing and amount of IPO remains so far open. Previously, the company’s management talked about the first half of 2012, but in light of the large-scale privatization the IPO timing may be shifted.
Diamond chip
Today, ALROSA’s shares do not look cheap. Given the profit in 2010, the company’s P/E = 17 and this is quite a lot for the company, which has a stable output on the backdrop of a cyclical market. In 2009, for example, diamond demand plummeted, and over a third of stones extracted by ALROSA were bought by Gokhran. Therefore, explosive growth due to expansion of the company's business is hardly possible.
Andrei Gritsenko, General Manager of Capital Upravlenie Ativami is sure that it primarily depends on ALROSA itself whether it will become a "blue chip" or not. If a company deems it important to maintain a high status of its stock and capitalization, then it needs an IR-department: its employees must constantly communicate with analysts from investment companies for which the entire chain of business operations should be transparent, not “gray.” Among other things, the shares should have a good free float in Russia. Potentially, ALROSA’s share could be a protective security, whose rate does not correlate with the overall market, especially as asset managers do have demand for a non-oil-related chip.
By market capitalization, ALROSA is currently comparable with Polymetal, so after an IPO it could easily get a weight of 1.5% in the MICEX index. This will ensure demand for its shares from funds. "But ideally, its equities should get into the MSCI index - then it will turn to be a chip for sure. If the company is not going to work with investors, its shares will be at the junction between the second tier and "blue chips" such as the securities of Aeroflot," Gritsenko said.
"In future years, ALROSA’s shares will be able to take a position on the market comparable to the positions enjoyed by securities issued by VSMPO-Avisma, Raspadskaya or Polymetal which float equities having an average level of liquidity and which are attractive for operations ranging from one quarter to half a year in time," Alexey Logvin, Chief Economist of Rus-Capital, told the Expert.
ALROSA is close to Polymetal by the nature of its business, but it is worth to compare its shares to those floated by Uralkali due to a combination of factors. The latter’s equities turned to be in high demand in 2007 amid rising prices for fertilizers. Riding this wave, Uralkali carried out an IPO and its market capitalization increased almost tenfold from 2006 to 2011. Fundamentally, Uralkali’s shares are also quite expensive (the company’s P/E was 28.5 in 2010 taking into account Silvinit’s profits), but this is justified by a continuously high return on capital, something which is missed by ALROSA (43% vs. 14.5 %).
It should also be kept in mind that in contrast to Uralkali’s equities ALROSA’s shares could come under the pressure on the part of sellers immediately after its IPO – those sellers who are now buying the company’s shares in view of their future placement.
