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!