As I tweeted the other day I have just bought some Moscow Stock Exchange (MOEX). Increasingly I am tempted by low price, high quality companies in somewhat lower quality locations.
To me MOEX meets the quality bar. It has a dominant market position being the only exchange in Russia, it has an EBITDA margin of over 70%, a net profit margin of c45%. There hasnt been much growth in operating income over the past few years – but it doesnt really matter as this is very, very cheap. It is trading on about twice book value and a PE of about 10.
The yield is about 8% – one of the highest amongst exchanges in the world. There is a 15% withholding tax in Russia.
On to the underlying business – there is much more to it than equity trading alone, the table below shows where revenue is coming from (P177 2018 AR).
My major concern with this is that a lot of income is coming from ‘interest and finance income’. They seem to be able to earn on client funds! (Slide 10 here)
This is a decent return when you are earning it on other people’s money!
If rates go down I would guess fees / other charges would be rebalanced to get the same revenue – but it is a potential risk, though I consider it minor.
Another major risk is FX – the rouble by most measures appears to be undervalued. But that doesnt mean it cant get cheaper. There have been large moves in the USD/RUB exchange rate over the years. I am prepared to live with the risk – as part of a diversified portfolio.
A further risk is political. I hold these shares via interactive brokers – who have just started offering Russian stocks. What will happen if sanctions intensify ? Will my money here be frozen? Can I get my money out of Russia ? All these are valid concerns and things to think about – but are again best mitigated by diversification – no more than 15-20% in Russia, probably closer to 15% no matter how cheap it looks. I have a portfolio weight of 3% in this – possibly a bit low.
There is also the risk of Putin being deposed / dieing etc – to be honest I think the risk of instability in this instance is less than people think. Russia has already gone through a period of chaos under Gorbachev / Yeltsin and I dont think there is appetite for more.
There are a few potential positive catalysts.
- The Russian government is encouraging equity ownership There are deductions on opening investment accounts – which are very attractive – although only apply on relatively small ammounts – for detail see here and here. Russian individual investment is relatively low vs other EMs. Apparently the number of accounts rose from 366k to 894k between Q2 2018 and Q2 2019. If this sort of growth continues it will positively impact in time – strengthening liquidity, encouraging IPOs etc. Company data shows rapid growth in retail clients. This is here (P22).
- The Russian government is mandating a 50% payout ratio from companies in which it has a majority stake, often there are substantial minority listed stakes. It needs this money to balance it’s budget. Again this makes investing in Russia / MOEX attractive. MOEX doesnt have the government as a controlling shareholder – it doesnt have a controlling shareholder but is paying out regardless, it has an 89% payout ratio.
- There are substantial positive reasons to invest direct via MOEX rather than via a London GDR – the stock is less likely to get suspended due to sanctions. The spread is lower and when dividends are paid fees to depositary banks are much much lower – for (say) RusHydro – these are apparently 47% of the dividend amount. When every basis point counts this matters, (details here) (P56). They are taking share from the LSE on russian stocks.
- Interactive brokers have just turned on MOEX stocks – allowing investors to access it more easily, driving volume – and letting me buy MOEX itself.
- Taking a ten year+ view. If the world is warming – Russia is one country that will likely benefit – areas will become livable, resources accessible and lots of scope for development – and fee giving IPOs.
- Chinese money – MOEX are promoting the Russian market to the Chinese, with time they may well invest – they are much more comfortable with a murky regulatory environment. Russia is vastly cheaper than China generally, China on a PE of 14.4 vs Russia at c5.5, though obviously much more growth in China. BUT then again there are signs
I am concerned that this will take a while to rise in value. But it is a high quality company in a toll-booth like industry at a cheap price. There will be bumps along the road to get there – but remember – 8% yield and a PE of just, 10 whilst acting as a gateway to a very cheap market in a country with a huge land area, natural resources and still well educated population.
As ever thoughts are appreciated – I got this idea from a reader (sorry dont remember who) – so writing this blog is beginning to pay off!
Deep Value Investments Blog 
I also think that it makes sense to invest some money in Russian stocks as these stocks are among the cheapest stocks globally. On the other hand, one can of course always ask oneself why the valuation should improve right now. But at least the currency is cheap and the dividends are high.
A good article, why Russian stocks are cheap, can be found in the Mowcow Times.
https://www.themoscowtimes.com/2019/05/23/why-are-russian-stocks-so-cheap-a65702
Take a look at Czech stocks. Mucdh safer environment and the dividend payouts are very similar.. Eg. Philip Morris with divi closing to 10 percent, CEZ getting to seven percent. Moneta bank around 7 percent, Komercni banka as well.
Thanks for this – I had no idea. Its not all about payouts though P/E and P/B are also very important.
A company can reduce or cancel dividends at any time. Dividends are therefore only partially meaningful.
Have you read the book Red Notice? I just have, and it was a bit of an eye opener on Russia. Would recommend it.
I will take a look, I am very well aware of the corruption. Still I think it is not so much more corrupt than China/ India and it is in the price. Others would consider it uninvestable. Time will tell…
I’d recommend reading it too. The 2nd half of the book is a bit of a political crusade which is justified imo, but your probably right that being fleeced is the norm in most crony capitalist states. Russia is not unique in that regard. The first half of the book is a great read about his investing career and being one of the first on the ground during privatisations in the former communist countries of eastern Europe and Russia during the 90’s. Definitely some lessons for the likes of us in there.
I will take a look but I see it as a numbers game. The actual proportion of stocks / value ‘fleeced’ is small. It also tends to be in certain strategic sectors.
Also on a moral level, most of the guys fleeced stole the assets in the first place.
The reality is far better than the perception – and is dramatically changed from the situation in the 90s.
Hence the opportunity.
I would agree that it’s not like the 90’s anymore and there may (or may not) be a perception gap. I’d held the trust, JRS previously and bought Gazprom earlier in the year so I am in the same boat too. My thinking atm is that they have been slow learners but at some point should realise that ripping everyone off is self-defeating and destructive in the long run. It’s hopefully already happened.
The country seems to punch way below its weight economically and as you mention, the numbers also look good. Ultimately its at least partly a bet on the commodities cycle too, which appears to be well-positioned.
You could also take a look at Rushydro – which I hold.
Not convinced on Gazprom due to the political element.
They are trying to get away from just being a commodity play – time will tell if they do.