Here we go again. Yet another resource company from the former Soviet Union is seeking a premium listing in London and inclusion in a FTSE UK index.
The company in question, Kazakhstan-based oil and gas producer Zhaikmunai, is the latest in a string of firms to consider redomiciliation and swapping its existing GDRs for primary shares thereby opening up the possibility of joining the FTSE indices.
(Just to jog your memory, the other companies are steel producer Evraz, gold players Polyus Gold and Polymetal, fertiliser maker UralKali and Bank of Georgia.)
Evraz and Polymetal are widely expected to be included in the FTSE 100 after the next index review due on December 7, and could blaze a trail for others from the region wanting to follow suit.
Companies from the former Soviet region have been coming to London in their droves since the middle of the last decade, typically via secondary GDR listings with a primary listing in Moscow. Some of the biggest companies from the region, such as Rosneft and Severstal, have come to the LSE in this way.
And in the same way that the Sistema IPO blazed a trial for secondary London listings for Russia/CIS companies, perhaps the inclusion of Evraz and Polymetal in the FTSE 100 (the first Russian companies to join the index) could see many other firms seek primary listings.
For a sense of the scale of the Russia/CIS presence on the LSE, these are all the companies from the region with GDR listings on the LSE’s main market:
Source: LSE
But London’s willingness to accept a slew of primary listings from the region is unclear. Some investors have already expressed concern over the plans of companies such as Evraz, Polyus Gold and Polymetal because all are owned by oligarchs and are resource-based, which in the mind of some investors is a recipe for disaster (remember ENRC?!). The less-than-stipulated free float at Polyus has done little to calm such fears.
As a result the FTSE Group launched a consultation on the free float rules for its various indices. (FT Alphaville has also polled the market to ask what rules should govern entry to the FTSE UK indices).
It may be unwise to turn these companies away, although insisting that they meet London’s highest standards is a no-brainer. As we have pointed out, even accounting for corporate governance and the related complications of doing business in places like Kazakhstan or Russia, most of the companies that have expressed an interest in a primary listing have very attractive growth profiles.
When it comes to Zhaikmunai, which has its sights on the FTSE 250, this is certainly the case. ING recently rated the Kazakh company as one of “the most exciting investment opportunities” in the oil sector in Russia and Kazakhstan. This is because it is cheap — trading on 2.1x 2012F EV/EBITDA — and has potential to double its output in a relatively short space of time.
In addition, in contrast to a number of the other Russia/CIS firms looking at premium listings, Zhaikmunai is not owned by oligarchs.
Private equity veteran Frank Monstrey is the company’s leading shareholder with a 28 per cent stake, while other shareholders include KazStroyService (27 per cent), Russian private equity firm Vostock Capital Partners (13 per cent), Prudential, Franklin Resources, JPMorgan Asset Management and Henderson Global.
Zhaikmunai also meets the UKLA and FTSE Group free float requirements, with 33 per cent of its shares freely traded. However, it will need to expand the number of independent directors — there are only three independent non-executives on the seven-member board.
Related links:
If we ran the FTSE 100… – FT Alphaville
Russians and the FTSE – what do the Russians get? – FT Alphaville
Russians and the FTSE – what does London get? – FT Alphaville