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The three for prefs

Date of publication: 15 February 2018 Printable version

Investors from Saudi Arabia, Japan and RDIF amass preferred shares of Transneft.

Foreign investors from Japan and Saudi Arabia, along with RDIF, have by now purchased Transneft preferred shares to nearly $585 million (some RUB 34 billion at the current rate of exchange), which roughly amounts to 7% of such securities, as Kommersant found out. Investors have been showing more interest in them since Transneft equalised dividends on all types of stock. If the Company keeps its promise and maintains the payments at some RUB 60 billion in 2018, all pref owners will gain some RUB 13 billion (circa $226 million). The amount can nearly double if the state makes the Company pay 50% of its net income under IFRS.

Kommersant has found out how foreign investors accessed the capital of Transneft. From 2017, they have purchased the monopoly’s preferred stock amounting to $470 million, according to a source familiar with the transactions. Incidentally, the Russia-Japan Investment Fund (RJIF, a JV by RDIF and Japan’s JBIC) invested $134 million in November. Saudi Arabia’s PIF sovereign wealth fund became a shareholder of Transneft in December, but the source of Kommersant wouldn’t disclose its stake. Altogether, in 2017 the foreign partners of RDIF and the fund itself purchased Transneft prefs to $321 million, $114 million being RDIF investments. In total, the investors spent $584 million, and can increase their stakes, Kommersant sources believe.

As estimated by market experts, the RDIF stock is about 2.8%, followed by 2.7% with RJIF and PIF’s 1.5% of the total number of Transneft prefs. The state owns 100% of the monopoly’s ordinary shares (78.1% of the authorised capital).

For a long while the major part of Transneft prefs (about 71%) was owned by Ilya Sherbovich’s UCP, against which the monopoly waged prolonged litigations regarding the dividend amount.

Until last year, only 10% of the net income was paid on prefs under RAS, and the state was receiving much more. However, the dividend amount was equalised after the amendment of Transneft’s AoA in March 2017. Before long, UCP withdrew the suit and sold the interest on the stock exchange for nearly RUB 170 billion.

The bulk of the share (53.57%) went under fiduciary management to Gazprombank – Financial (Transneft Invest, a Transneft entity, being the controlling stakeholder, the rest held by Gazprombank and its entities). Gazfond Pension Savings brought another 14.85% of prefs, and 1.49% went to the Russia-China Investment Fund (RCIF, established by RDIF and China’s CIC). RDIF then directly obtained 0.43% of the stock. The rest of the prefs (some 30%) are in free circulation.

The monopoly was not raising any new funds from transactions with its securities, explained Igor Demin, Advisor to the President of Transneft. “The shares are purchased for the sole purpose of receiving stock dividends. The growth in such payments expressly influences the popularity of the stock,” he said. In 2016 and H1 2017, Transneft paid some RUB 59 billion of dividends. Having foreign investors is a matter of prestige; it is a way of showing that the management’s performance is seen as effective, Igor Demin says.

RDIF refused to comment, despite the interest in increasing the Company’s capitalisation they expressed earlier and their belief that the prefs have growth potential (now RUB 180,400 per share at MOEX). RDIF offered to convert prefs into ordinary shares, authorise voting on them and set a system to incentivise the management based on stock quotations. Investment banks expected the stock to show a price hike, reaching RUB 220,000 – 250,000 per share. The price has not hit a similar level yet, with the peak of RUB 204,000 in January 2017.

It is yet unclear what dividends Transneft will pay. Its dividend policy suggests 25% of the net income under IFRS, but the government regularly raises the issue of boosting the payments by state-owned companies to 50%. In 2018, the Company expected to preserve the payments unchanged versus the previous year, i.e. at some RUB 60 billion, Maksim Grishanin, First Vice President of Transneft, said earlier this year. VTB Capital’s Ekaterina Rodina also believes the new investors expect a higher dividend yield. If Transneft raises the payments to 50% of its net income to comply with IFRS for 2018, the return may go above 7%, the investment bank estimates. Potential conversion of the prefs or Transneft’s IPO may drive up the quotations, the expert says.

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