Last week brought positive news on my favourite way of playing the Russian economy – Raven Russia. According to the in-house research note from Edison the big plus was that net operating income grew 14% compared with H117, to $79.3m.
“Within this, the investment portfolio NOI grew by 17% to $73.9m, and was also 6% ahead on H217. We estimate that FY17 acquisitions had a positive impact of $8-9m, while an increase in occupancy to 87% (December 2017: 81%) more than offset continuing reversion to market rent levels. NOI was slightly lower at logistics subsidiary, RosLogistics, while the decline in NOI compared with H217 at the UK development subsidiary, Raven Mount, reflects the non-repeat of the one-off gain of c $20m generated by the sale of most of its non-core, legacy land bank…..Underlying earnings increased 12.3% to $11.9m excluding FX, but including FX declined to $3.2m compared with $15.5m in H117. Including the negative property revaluation, also driven by foreign exchange translation, the pre-tax loss on an IFRS basis was $37.1m. Fully diluted underlying EPS was $0.48. There was no dilutive effect from the convertible preference shares in H118 (unlike in FY17) as the finance expense relating to them was greater than the basic IFRS earnings.”
Obviously the shares have had a rough time over the last few weeks, as worries about EM equities in general, and Russian political ‘challenges’ have accumulated. I have no time for the Russian regime and think that it is foolishly creating too much trouble for its own good. Soothing national egos is all well and good but eventually one has to focus more on building a prosperous economy – which can pay for those recently reformed pensions. Just imagine what might happen if Putin dialled down his talk and focused on domestic economics – Russian shares would shoot up.
In that scenario, Raven Russia would probably be a prime beneficiary. It’s a well-run business with smart, locally based managers, who clearly know their market very well. It’s also in that crucial sweet spot – building large logistics warehouses for big brands (many foreign owned). If it was investing in big boxes in France or the UK, it would trade at a stonking premium. Instead, its discount just keeps getting worse.
Crucially there are also a number of different ways to buy into the Raven story – all of which bar the convertible preference shares are traded on the main market.
- According to Edison’s note “The ordinary shares offer a good level of yield and provide investors will full upside to NAV growth or discount narrowing. Based on our forecast distribution of 2.5p for FY18, the yield is 6.3% and the discount to fully diluted adjusted NAV is c 26%. Distributions are variable and are normally made via tender offer buy backs
- The convertible preference shares (RAVC) rank ahead of other share classes in terms of dividend payments and receive a cumulative 6.5% preferential dividend on the subscription amount of 100p, a cash yield of 5.5% on the current price of 118.5p. The convertible preference shares are redeemable by the company on 26 July 2026 at 1.35, and can be converted into ordinary shares at the holders request at any time prior to redemption, currently at a rate of 1.759 (equivalent to c 67p per ordinary share at the current price), a premium of c 69%.
- The (non-convertible) preference shares (RAVP) earn a cumulative 12% dividend on the fixed issue amount per share of 100p, ranking ahead of the ordinary shares. At a current price of 144.5p, the yield is 8.3%.
Overall the portfolio value increased by 7% in rouble terms. Diluted IFRS NAV per ordinary share at end-H18 was 76c and on a fully diluted adjusted basis (adjusted for goodwill, deferred tax on valuation gains, fair value movements on derivative contracts and cumulative FX movements on preference shares) it was 71c. At an exchange rate of $1.31/£, this represents c 54p for a P/NAV discount of c 26%.
BUT I would add one last note. A colleague emailed last week after visiting Lithuania. They noted that everyone seemed really worried about a Russian Little Green Man incursion. There were also a multitude of NATO officers in situ to reassure fearful natives. The potential for real chaos is very real and if Putin does decide to test his luck, all bets would be off – and we’d be staring at a potential Third World War. Likely, no, possible, yes.