OREANDA-NEWS. November 13, 2009. MSCI Barra rebalanced its indices and included Sberbank’s preferred shares into the MSCI Russia Standard Index with a pro forma weighting of 0.67%. In light of this, we are reducing our target pref/ord discount from 30% to 20% and upgrading our 12 month Target Price 16% to USD 2.5. This now implies 36% upside potential from current levels and so we are reiterating our BUY recommendation.

Sberbank prefs’ return to the index is a strong catalyst for the stock, although it was partly expected given their recent strong performance (they are up 20% over the week, compared with the 10% rise in ords), which drove the discount to compress to 25%. Following the announcement we expect the discount to contract further to 20%. The inclusion is effective as of 1 December 2009.

Prefs’ liquidity has notably improved this year, which also justifies the reduction of the discount to ords. For example, over the last month the average daily volume was 84 million shares, implying turnover of USD 120mn on a daily basis.

The likely inclusion of Sberbank’s prefs into the DR programme is another possible driver (although management currently dismisses such an idea). We note, though, that the bank would face no legal obstacle to including them.

Attractive valuation. Trading at a 2010F P/BV of 1.38 (an 18% discount to GEM) and a 2011F P/E of 5.5, the prefs’ valuation looks attractive. The discount to ords is currently 25% and we believe there is still some steam left in the contraction trade. We are therefore reiterating our BUY recommendation.