Way for beginners: how to make money on an IPO in Russia

Over the past five years the Moscow stock exchange has left about 42%, i.e. almost every second, the Issuer held a delisting. Against this background, investors have virtually ceased to believe in the successful IPO of the Russian companies. However, in 2017, the situation may change, and the market will see the return of the interest of issuers to IPO on stock exchanges in Russia. There are a couple of reasons. First, in Russia there were favorable conditions for the inflow of foreign investment. In 2016, the dollar indicator of RTS grew by 52%, which is almost the best result among world indices. The Russian stock market remains the most undervalued among the BRICS countries — the ratio of the capitalization of companies to their net income in the country is 8.8 x, while in China — 12.6 x, Brazil — 16.4 x, South Africa — 17.1 x, India — 21,2 H.

If this year’s anti-Russian sanctions are weak, we will see an increase in the inflow of new funds into the country from Western funds. In January this year, the company EPFR Global has recorded a record volume of foreign investments in Russian assets ($500 million). By mid-February, inflows into funds investing in Russian stocks showed the growth of the 13th week in a row. This means that the demand for new high quality paper will increase.

Secondly, in the past year we have witnessed historically low inflation, prices rose just 5.4%. Against this background, interest rates on deposits continue to decline — now at the ten largest banks, the average rate is slightly more than 8%. This will contribute to a rethinking of the approach to the savings of the population, so we can expect the flow of funds from deposits to securities. In these circumstances, the Russian stock market becomes more attractive for domestic companies. The process has already started: late last year we saw the IPO of RussNeft, and in February 2017 — a successful IPO, the company, which is focused on domestic demand. In the course of placement of shares of “RussNeft” the demand exceeded supply by 30%, while the IPO “Children’s world” — in 1,5 times.

If you look more on the results of the secondary public offerings (SPO), it turns out that since the beginning of the year of Russian issuers offered investors the maximum volume over the past six years. Thus, in the framework of the SPO pipe metallurgical company placed $180 million, PhosAgro — at $250 million, UC Rusal $240 million in Total, according to analysts Citi, the volume of initial and secondary placements by Russian issuers in 2017 of $1.2 billion.

It is possible that the example of these companies will be followed by other market participants, who several years ago was postponed IPO in anticipation of a good “Windows”. In particular, the stock market can go petrochemical giant SIBUR and a leading Russian developer of software “1C”, which will play on investors ‘ interest to the relevant sectors of the market. There have also been reports about a possible sale of package of securities of the holding “Step,” which became one of the beneficiaries of the import substitution policy.

What are the challenges to the investor buying shares of a company that completed an IPO? First of all it is important to keep a cool head and not look at the hype in the media that accompanies accommodation, and financial metrics and how top management achieves stated objectives. We should also pay attention to the reputation of the management and majority shareholders. The last factor is especially important in Russia, where the interests of minority shareholders are often violated. An important indicator for the attitude towards minority shareholders is the company’s dividend policy, so you should also learn about the frequency of dividend payment and stability of cash flow.

Much depends on the investment horizon and risk profile of the investor. If the investor is willing to take risks to obtain high yield due to the increase in the market value of securities, he should pay attention to companies that are planning to double or triple revenue for a few years. As a positive example, consider shares of Facebook. The company completed the IPO in may 2012, and several months, her papers fell by half, from $38 to 19 apiece — due to weak financial results. However, Facebook was able to overcome the crisis, and then every year the company has improved its performance. In the third quarter of 2016 year net profit Facebook has grown to $2.3 billion, and the company is currently trading at $136,93, that is the level of IPO exceeded 3.5 times.

However, not all companies can deliver on their promises for growth. Immediately after placing in 2013, Twitter shares rose 73% to $45 apiece — at an initial price of $26. But then the excitement subsided and the company was not able to get out of losses that amount to hundreds of millions of dollars. Now Twitter shares are trading at $15.8 for the paper, that is 38% lower than four years ago. Thus, investments into high-growth companies during the IPO are associated with serious risk, which it should always be remembered. Anyway, the more new offerings — the more possibilities the investor to diversify the portfolio. Because we all already tired of reading recommendations for the same 20-30 stocks, the list of which has not changed since ten years.