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Moscow Times
November 19, 2007
Investors Cash in on Infrastructure Boom
By Catrina Stewart
Staff Writer

As Muscovites wrap up warm this week with the onset of winter, investors are still looking for exposure to this year's big story, the government's infrastructure spending.

President Vladimir Putin last week backed plans to plow $191 billion into the power and railway sectors, and $53 billion of that for transportation, by 2011.

But it is the metals sector that is tugging on investor sentiment, and since Putin first started talking in July about the government's plans to sink lots of cash into the infrastructure of the country's Olympic bid-winning city, Sochi, steel stocks have enjoyed an impressive run.

Renaissance Capital investment bank said Friday that the increased spending plans would be good for rail stocks and the suppliers of railways, particularly steelmaker Evraz.

"It's not a massive amount of money," said Tom Mundy, equity strategist at Renaissance. "But it's certainly enough to draw attention to the story again. The key question is when will the companies actually see this filter down."

While the bank identified a couple of transportation picks -- Far East Shipping Co. and Rhythm -- steel, and Evraz especially, remains the obvious entry card for most investors.

"If you are looking for access to the story, the steel sector is one of the few liquid stories you can play," said Michael Kavanagh, a metals analyst at UralSib.

Goldman Sachs was similarly positive on the steel sector this week, reiterating its "Buy" recommendation on Severstal and initiating a "Buy" on Mechel, which has shot to the forefront of investors' minds lately through some attractive coal acquisitions.

Evraz, which has a monopoly over steel supplies to the rail industry, might have been expected to rise on this wave of positive sentiment, but like the Russian market in general, its Global Depositary Receipts were trading down at $68.60 on Friday afternoon in London. And it is still some way off its October high of $83.50 per share.

James Fenkner, a managing partner at Red Star Asset Management, said metals stocks are beginning to look pretty expensive.

"Metal stocks have had a fantastic run," he said. "Based on their financial ratios, they are not cheap. You have to believe in infrastructure growth."

Indeed, analysts warned that steel stocks could be reaching the top of their run for now.

"We think the stocks have run pretty hard, and it is difficult to see a catalyst to take them to the next level from here at this stage," Kavanagh said.

For the first time in several weeks, both the city's exchanges showed losses over the week.

The MICEX fell 1.2 percent Friday to 1,833.28, closing 3.1 percent down on the week, while the RTS Index fell 1.3 percent Friday to 2,189.37 points, down 3.3 percent on the week.

Analysts said a combination of factors were in play, not least the falling oil price that has pushed down the liquid blue chip stocks. Disappointing half-yearly results among some of the big names, particularly Surgutneftegaz, added to the woes.

"It's not so surprising that [the markets] would correct to some extent," Mundy said.

But analysts were cheered by a wave of good results from smaller stocks, such as Nutritek and two Eurochem subsidiaries, while the banking sector is looking increasingly resilient against the backdrop of the ongoing global troubles.