Russian property company AFI Development joined the market last week, and already over $1bn has been lost.
Shares are hard to value -- some harder than others -- and it's often difficult to find the right balance between sloppiness and spurious accuracy. Take last week's flotation of AFI Development
(LSE: AFID)
, a property company focused on Moscow and St Petersburg:
- Guideline share price: $10 to $13 -- quite a range!
- Actual placing price: $14 -- considerably up on the guide price;
- Subsequent low: $11.13 -- a fall of 21.5% in a matter of days.
To put in another way, sophisticated institutional investors coughed up $1.4bn of other people's money, valuing AFI at $7.3bn. A week later the company is worth $5.8bn, down by more than the total value of funds raised. If you ever bring a company to the market, you'd want to have AFI's team on your side.
It's even more remarkable when you consider that AFI's portfolio was provisionally valued at only $3.8bn. Adding the $1.4m raised (gross -- I have no information on the cost of the flotation), gives a net asset value (NAV) of around $5.2bn, and a premium at IPO of 40%. I'm no property expert, but that sounds pretty steep to me; typical values for British property companies are in the range +/-10% of NAV, although I understand Russian property companies are generally more expensive.
This can be partly explained by stated NAVs not keeping pace with the recent boom in Russian property prices, and by the expectation of further significant gains. While I can't claim any proficiency in Russian, I understand this graph to show the price of residential property in Moscow (in $ per sq metre) -- it has recently doubled in a year, but subsequently fell back. For what it's worth, the same site also reports expectations turning negative.
Looking at future drivers for Russian property, and for AFI in particular, it's a very mixed bag. On the plus side:
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Russian economy: eight uninterrupted years of GDP growth, averaging 6.6%; inflation below 10% for the first time in ten years;
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Foreign direct investment: doubled last year, to $30bn;
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Oil and gas revenues: should continue to boost the economy.
While on the other hand:
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Demographics: population,currently 141m, is falling by 700k per annum;
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Corruption and corporate governance issues: not up to the standards we might like;
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Political uncertainty: how much longer can the government keep dissent under control, and then what happens?
As far as AFI is concerned, its portfolio is much more commercial than residential, so I'd expect the economic factors to be more important than the dismal demographics. It may also be the case that increased prosperity has a positive effect on life-expectancy, so the population decline could be halted in the coming years.
These are all long-term issues, and in the short-term I'd be much more concerned about the valuation. The price has recovered a little this morning, currently $12.25, and to me it appears to be pricing in continued growth. I'd also question the extent to which we can rely on estimates of portfolio value, given the state of the market. The professionals who bought at $14 may eventually be proved right, but this is not one for me.
More: Don't Buy At Flotation | AIMski
