2. Target (fundamental level): $96.75 (ITI Capital estimate)
Term: till year end
Why stocks tumble?
There are two reasons behind correction in Lukoil shares seen in late April — mid-May: weaker global demand for risky assets after a rally that started at the beginning of the year and the escalating trade dispute between the US and China.
Lukoil stocks dropped by 4.5% in the past two days following MSCI Russia semi-annual review. The changes were announced on May 13 at 11 PM Moscow
As we pointed in our latest report, Lukoil’s weight in the index may tumble by 1.3% due to a drop in the free-float (FF) from 65% to 55% following a buy-back carried out from September 2018 to April 2019. As of today, the programme amounted to $31 mln, or 4.1% of the outstanding shares. At that, we expected the outflow of passive capital from the company's stocks to reach $ 65–70 mln, marginally above the average daily turnover
However according to MSCI official figures, the free float fell by 10% to 55%, which implies that the weight in index would decline by three times or 3.5%. Hence, the outflow of passive capital reached $200 mln, roughly the turnover of two-three trading sessions. The outflow of active capital may reach $250 mln.
In the past two days, trading volume amounted to $175 mln and $97 mln respectively, average turnover was $70 mln. Therefore, we can assume that the outflow has ceased, and the MSCI changes are priced in by now implying that stock should rebound
Lukoil’s weight in the MSCI Russia, %
MSCI changes will be implemented as of the close of May 28, 2019. Lukoil’s weight in the index will drop to 16.3% from 19.8%. Following the review, Lukoil ranks second after Sberbank (19.14%), outstripping Gazprom on the margin
Why buy Lukoil?
Outstanding stocks buyback is $400 mln, roughly six average daily turnovers. The buyback terminates within a month. Lukoil is trading 22% below the target and 7% below the MICEX year-to-date, despite the fact that the company enjoys the highest free cash flow
We expect Lukoil to announce strong IFRS financial results for Q1 on May 29, 2019
Lukoil will vote on June 20 on capital reduction via 35 mln share cancellation (that were recently repurchased by buyback program) bringing outstanding shares to 715 mln
For the cancellation company plans to repurchase ordinary shares at 5, 450 rubles
We assume a correction in emerging and developed markets is nearing its end, as the US and China are working towards a trade deal that may be signed as soon as the end of June at the upcoming G-20 summit in Japan