OREANDA-NEWS. August 16, 2011. MSCI will post the list of additions to and deletions from its indices following its August 2011 Quarterly Index Review on its web site, www.msci.com, today shortly after 11pm Central European Summer Time (CEST).

Bottom line

We believe that Rostelecom’s common shares (not prefs) will be included in the MSCI Index with a potential weighting of 2.9%, subject to other companies’ MktCap fluctuations and MSCI policy. We stress here, that it is not absolutely clear whether or not MSCI will include Marshal Capital’s and Evgeny Yurchenko’s stakes in the free float calculation. That said, a positive reaction to the news is likely. Official inclusion in the Index is expected to be effective 1 Sep.

MSCI Index inclusion should facilitate an LSE listing. We believe the latter is likely to materialise in 4Q11 after the 1H11 IFRS results are released (scheduled for October). The current instability in the financial markets should not necessarily reduce the listing’s likelihood as the company does not plan to conduct an SPO or raise money. Rostelecom’s current shareholders are likely to welcome GDR conversion due to higher liquidity prospects.  We believe inclusion in the MSCI Index and an LSE listing will foster the rebalancing of Rostelecom’s overall shareholder structure in favour of international institutional clients.

The stock underperformed the market during the correction on technical risks… Since the market sell-off on 1 Aug, Rostelecom has slumped 21%, while the MICEX Index lost 14%. Our opinion is that the stock’s underperformance centres on whether Evgeny Yurchenko and his fund (totalling of 7% in Rostelecom) are to face a margin call. In our view, this risk is mitigated by the following factors:

- If Yurchenko is forced to sell his entire 7% stake, the real free float would rise to around 37% (another 7% is held by Marshall Capital). While this would likely create share overhang, we do not see the increase as dramatic.

- A significant portion of the shares were bought cheaply in 2008-10. Yurchenko began accumulating Rostelecom in the form of Regional Telecom Operators’ shares in 2008. Since that time his investments have appreciated in value several times.

…although it is essentially defensive in nature. Telecoms are a relatively non-cyclical business and are essentially a utility service. Telecom consumption could only deteriorate significantly in the case of severe unemployment in our view, which is not a real risk at the moment. We believe slower-than-expected economic growth dynamics could position Rostelecom as a defensive stock.