Vecht, who also runs the Frontiers investment trust as well as the firm’s open-end BGF Emerging Europe fund, said that despite Gazprom’s difficulties, the risks of a blow-up hurting Gazprom are now more than priced in, while the Russian firm also stands to benefit from the wider recovery in Europe – where gas exports have risen 25% year-on-year – and a key gas tie-up with China.
Vecht said Gazprom has, until recently, been “out of favour” with investors, though he continued that with its recent dividend hike and discounted share price, investors were unfairly bearish on the stock. “We believe the risks of Gazprom are more than priced into the valuation. Trading on three times earnings the current valuation overlooks a number of virtues. Gazprom has raised its dividend payout ratio substantially over the last few years, as have a number of state companies.
The last dividend payment was almost two and a half times greater than that delivered before the credit crisis in 2008, while net income in 2012 was up 50% from the same year. Despite this, the stock performance remains 55% lower than its 2008 peak.”
Bolstering Vecht’s views, Gazprom is set to strike a deal to supply gas to China, where although there have been concerns about growth slowing, the Tiger remains one of the globe’s largest economies.
Early estimates suggest that a tie-up between China and the Russian energy giant could see Gazprom export around 40 billion cubic metres of gas to the region, equivalent to roughly a third of the company’s entire European exports.
Vecht said that typically, export operations are far more profitable that domestic sales, so the potential impact on Gazprom’s profitability should be greater than analysis of the volumes alone would suggest.
Within the manager’s portfolio, energy accounts for roughly 25% of the trust’s net asset value, while Gazprom accounts for just over 10% of total market value, making it the second largest holding behind Sberbank in Vecht’s trust.
Elsewhere, Vecht has also been looking to play Polish financials and during September he added to PKO BP, where he believes earnings momentum is likely to be highest among its peers. Vecht’s positive take is based on the improving Polish economy, which should encourage banks to lend and boost asset quality as a result.
Vecht explained: “[PKO] is one of the cheapest Polish banks and, with an unrivalled deposit base, is best-placed to take advantage of the slightly higher interest rate environment.’ Over 12 months to the end of September, Vecht’s BlackRock Emerging Europe trust’s share price has kept pace with the MSCI Eastern Europe Index. Both increased by slightly over 7%, though Vecht has grown the fund’s portfolio by 9.4%.
