ITI Capital: Buy Russian Lukoil (LKOD LI Equity) with good upside

Отдел аналитики

Current price: $81

1. Target (short-term level): $82.58 (100-day moving average)
2. Target (short-term level): $86.41 (50-day moving average)

Term: till June

2. Target (fundamental level): $96.75 (ITI Capital estimate)

Term: till year end

Stop/Loss: $77

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

Lukoil technical picture (LKOH RX)

Отдел аналитики
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