The past year-and-a-half has not been kind to investors in Ukraine's local equity market. Despite a recent uptick, the main index, the UX, is still down over 60 percent from March 2011 and many names are highly illiquid.
But with the annual shareholder meeting
season about to open, a new report from leading Kyiv-based investment
bank Concorde Capital suggests some clever solutions to spring-clean
your portfolio.
After a long period in the doldrums,
Ukrainian equities are finally starting to gain a little ground,
rising 10 percent since the beginning of 2013. Nonetheless, a weaker
performance than Western peers and continued worries about respect
for minority rights, lack of liquidity, and the establishment of a
controversial national clearance system means that many are
interested in selling their holdings.
To lock down a decent exit price, the
investment bank suggests using a “significant
deal” clause, present in many shareholder agreements. The
clause stipulates that any participant in the Annual General Meeting
(AGM) who votes against a significant deal (typically a contract
worth more than 25 percent of a company’s assets), can sell back
their shares to the issuer for a price not lower than the market
price four days before the meeting. This gives the investor a “put
option” to sell shares back within 30 days.
Such significant deals
need to be approved at AGMs. They are particularly common for
companies owned by the holding SCM, owned by Ukraine’s richest man
Rinat Akhmetov, which use intercompany deals to optimize cash flows,
as well as members of holdings involved in large borrowings.
“The practice is also
common for the machinery sector, which is focused on a small group of
suppliers or customers, and is inherent for power generation
companies which sign large coal supply contracts,” the report
notes.
Concorde Capital identified 37 stocks
for which this option could be used, mostly to get rid of illiquid
names, but also as a way to speculate on price movements. Indeed, if
investors buy up shares before the AGM they can lock in even better
prices later, though there is no guarantee a significant deal will
need approval or when the AGM will take place (by law they should be
announced by March 29, though).
A further option is an arbitrage
option, which results from the stock prices often dropping after
AGMs. If so, it is possible to buy shares cheaper than those that are
being sold, though market awareness of this trick has increased,
meaning that it is unlikely to be as lucrative as it was in the past.
The Concorde Capital report also
highlights the seaon’s potential for dividend plays. Since companies
pay out a large share of their profits – over 90 percent in the
case of Metinvest-owned Khartsyzk Pipe or Central Iron Ore – in the
form of dividends, yields can easily climb into the double digits.
But investors should note that many
names saw profits dip in 2012, sometimes on purpose.
“The key problem of
these companies is that management usually considers dividends as
additional tax on profits and therefore tends to do their best to not
report hefty profits for the full year,” the report reads, pointing
to the example of Donbasenergo, for which profits dropped from Hr 305
million ($37 million) in the first nine months to Hr 31 million in
the full year of 2012.
The strategies outlined present other
risks, too. For one, investors could find themselves unable to vote
at an AGM, either for technical reasons or due to the company’s
efforts, and would thus forfeit the put option.
An illiquid market and unhelpful
companies mean that finding the strike price can also pose problems,
or at least delay the operation. The report notes that DTEK and
Metinvest related stocks are the least risky, while state-controlled
ones are the most uncertain.
Kyiv Post editor Jakub Parusinski
can be reached at [email protected]
