Infrastructure in Russia needs a hefty injection of cash but returns from these investments are "very juicy", says Plamen Monovski, CIO of Renaissance Asset Managers (RAM).
Infrastructure in Russia needs a hefty injection of cash but returns from these investments are “very juicy”, says Plamen Monovski, CIO of Renaissance Asset Managers (RAM).
Returns on capital invested in infrastructure companies in Russia can easily exceed 20%, he said. At the same time, valuations are low, partly because of the traditional discount on Russian equities. RAM’s own Russia Infrastructure Equities Limited (REIL) fund is trading at a 26% discount, a notable improvement from a recent discount of 43%.
Investor sentiment has been improving. High net worth individuals, who often spot opportunities earlier than other fund allocators, are flocking to the asset class, increasingly choosing it over the traditional Russian commodity play.
Unlike commodities, infrastructure is the largest controllable factor the Kremlin has at its disposal to improve the GDP profile of the country. Takouhi Tchertchian, portfolio manager at RAM in charge of infrastructure investment, said: “The country is losing two percentage points of GDP every year due to bad infrastructure.”
With investment in infrastructure assets, GDP could increase from 4% to 6% per annum, so attracting money into the asset class is top of Russian President Vladimir Putin’s agenda, and a focus of attention in both his pre- and post-election speeches.
Further support is likely from various special events coming up in the next few years, including the Winter Olympics in Sochi 2014, the 2018 FIFA World Cup, and the Asian Pacific Economic Cooperation (APEC) Summit, to be held in in Vladivostok in September.
According to estimates, the Olympics and the World Cup will require $30bn and $50bn of investment respectively. Around $10bn-$15bn is to be spent on the APEC meeting. There is no lack of investment opportunities in infrastructure – few have been made over the last five or six decades, yet the Russian railway network is the third largest in the world.
The goods high-spending Russians import have to be transferred to their destinations, so companies involved in containerisation and transportation of assets are a major part of the RAM fund’s portfolio. One of the largest holdings is TransContainer, which controls 55% of the market. Its revenue growth is around 70%, while earnings are 35%. Similarly, ports are a favourite, with names like Global Ports and Novorossiysk.
Another major holding in the fund is Mostotrest, the largest listed road constructor, which is also recording exceptional revenue growth. “There are no roads in Russia, it’s a huge problem, especially now there is organised retail,” commented Monovski.
But it is not just transportation that offers value to investors. Property construction is booming. Skyscrapers are springing up all over Moscow. Monovski (pictured) mentioned Raven Russia — a company specialising in commercial real estate, which made the Guinness World Book of Records for building one million square metres of property in one year. Now it is one of the top dividend paying holdings in the world and brings attractive yields on investment.
However, there is a reason for low valuations. Investors are wary of the effects of volatile oil prices and the corruption in the country. Monovski counters that the oil price does not affect infrastructure, while corruption is diminishing. “We don’t have to get involved with corruption at all. The tenders we bid on are very transparent,” he said.
He hopes recently announced plans to give RAM’s infrastructure fund a Ucits-compliant structure will attract investors to the asset class and reduce the discount at which the fund is currently trading. Since inception the fund has outperformed Russia’s RTS equities index by 11%, but the manager estimates it has 50% upside potential over the next three years.