Well prepared and resilient
Given current conditions in the Russian market, we believe the trading update provided by Raven Russia (LONDON:RUS) provides considerable comfort. The tenant base is proving robust, with limited lease breaks and expiries in 2015. The balance sheet is well positioned with a solid cash balance and debt maturity continuing to extend (now five years on average) with a slight fall in costs. Our reduced estimates incorporate FX movements and the assumption that market conditions remain weak through the forecast period. On a well supported 10% yield this appears discounted.
Macro headwinds have built
The combined effect of economic sanctions and weakening oil prices have put strong pressure on the rouble (down c 35% vs the US dollar since 30 June results). 2015 will be a tough year in Russia, and although unemployment remains low and non-oil exports are now more competitive, Russian government growth forecasts for the year have been cut (to -0.8% from +1.2%).
But Raven looks well prepared
Logistics rents are all US Dollar pegged. Raven has $181m cash in the bank, and has continued extending average debt maturity (now five years vs 4.4 years at H1) while still reducing the average cost. Although pressure on rents is to be expected at current exchange rates, lease breaks and maturities are not significant in 2015 (2016 more so) and the tenant base can be characterised as larger (international and domestic) organisations, generally more robust and strategically oriented. In current conditions, expected new building in 2015 is likely to be curtailed, such that 2016 should see limited new supply. Our revised estimates see 2016e NOI c 4% lower; however, we no longer see progressive DPS increases through the forecast period, expecting management to prudently manage cash balances until Russian bank lending shows signs of normalisation.
Valuation: Well supported yield
It is our view that the share price should and will be driven by income distributions rather than NAV. Given a relatively undeveloped Russian investment market, NAV is likely to be a more volatile indicator, although a 37% discount provides additional support. The ordinary shares offer a c 10% prospective yield and at 134p, the preference shares yield 8.9% on a fixed coupon.
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