September 26, 2013 / 1:38 PM / in 4 years

Russia's Sistema aims to cut 'conglomerate discount'

MOSCOW (Reuters) - Russian oil-to-telecoms group Sistema (SSAq.L) (AFKS.MM) wants to reduce a gap between its market capitalization and the value of its individual corporate holdings by selling some of them while expanding into new business lines.

Sistema has a market capitalization of $10 billion, but that represents only around half the value of its combined stakes in companies like Russia’s top mobile phone operator MTS (MBT.N) and mid-sized oil firm Bashneft (BANE.MM), according to Thomson Reuters data.

“If you take into account Sistema’s scale, the existing discount is unjustified and it will definitely narrow,” Chief Executive Mikhail Shamolin told the Reuters Russia Investment Summit.

“A reasonable discount would be 20-25 percent and Sistema has every chance to win it back ... We need to show a sustainable track record as an investment company so investors believe that we can not only invest money but also sell.”

Companies such as Sistema that have holdings across multiple businesses often have to contend with a so-called conglomerate discount, where their market capitalization is less than the sum of their parts.

Sistema, controlled by billionaire Vladimir Evtushenkov, could sell “anything” at the right price, although Shamolin stressed that there were no plans to divest its core businesses - MTS and Bashneft.

The two account for over 80 percent of Sistema’s revenues, which totaled $34.2 billion last year. Its portfolio also comprises assets in utilities, transportation, agriculture, chemicals, retail, banking and healthcare.

The company raised $1.2 billion in June from the sale of its 49 percent stake in Russneft in a deal that valued the oil firm at 12 times the price Sistema bought it for from businessman Mikhail Gutseriev in 2010.

It also hiked dividends, more than tripling the payout for 2012, which brought its dividend yield to around 3 percent.

Shamolin said Sistema, which occupies a historic building in front of the Kremlin’s walls, was moving smoothly ahead to further increase its dividend yield.

    “I think that investors’ current expectations are for a 5-6 percent dividend yield,” he said, referring to comparable companies.

    Sistema’s shares have been strong performers this year, even as Russian stocks have underperformed other emerging markets and developed markets have posted double-digit percentage gains.

    “Over the past half year, Sistema’s capitalization has risen by 30 percent. I think this year Sistema will be Russia’s fastest-growing company in terms of value,” said Shamolin.

    Sistema’s shares traded on Thursday in London (SSAq.L) at $25.39, up 26 percent in the year to date. In Moscow (AFKS.MM) its shares changed hands at 33.94 roubles, ahead 33 percent for the year.

    Evtushenkov owns 64.2 percent of Sistema, according to company filings. Its free float in London is around 19 percent and a further 5.2 percent of its shares trade on the Moscow Exchange.

    (For other news from Reuters Russian and Eastern Europe Investment Summit, click here)

    Additional reporting by Douglas Busvine, Maria Kiselyova, Anastasia Lyrchikova, Vladimir Soldatkin, Olesya Astakhova and Damir Khalmetov; Writing by Maria Kiselyova. Editing by Jane Merriman

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