Sistema's shares against the background of Segezha's IPO are attractive only speculatively

According to Bloomberg, Segezha, which is part of AFK Sistema, may announce an IPO as early as this week. The company expects to raise $500 million. The base scenario assumes Sistema's stake of 101 billion rubles, which corresponds to the fair value of AFKS shares at 47 rubles.

Is the IPO of Segezha worthwhile now? Nikolai Dudchenko, an independent financial analyst, answered Fortrader magazine's question.

- The IPO of Segezha group is clearly becoming one of the brightest events of this year on the Russian stock market. On April 12 the company announced its intention to float at least 30 billion rubles on the Moscow Stock Exchange. Currently, most analysts agree that the forthcoming floatation may have a positive impact on the shares of Sistema. One of the key reasons is said to be the reduction of non-public assets in the company's structure, which increases its transparency.

As for the prospects of price growth, the potential for further upward movement is estimated at 1-3 rubles (the most optimistic scenario assumes a price increase to 47 rubles).

Let's make our own brief analysis of the situation with the statements of Sistema and try to determine the future prospects of the price movement.

Over the last 2 years, the company has demonstrated a steady revenue growth rate. In 2018-2019, the company's revenue grew by 5%, amounting to 656.8 billion rubles vs. 625 billion rubles a year earlier. Characteristically, in 2019 the company demonstrated positive net profit for the first time in several years.

The debt load of the company is quite high. The share of total debt in the structure of assets is 96.7%. To be fair, it should be noted that the company has almost always had such a high level of indebtedness, and over the past year, long-term debt has decreased significantly, amounting to 640.9 billion rubles, compared with 775.6 billion rubles in 2018.

Conclusions: The upcoming IPO of Segezha Group may have a positive effect on the shares of Sistema, but one should keep in mind the very high debt burden and the prohibitively high P/E multiple. As a consequence, I would not consider Sistema shares for the long-term perspective, but as a speculative idea the securities of this company are quite suitable.