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Lukoil Preferred ADR (LUKPY:OTC) lives up to our forecast!
by Ned Humphrey
Back in December of 2000, on p. 44 of Taipan’s Annual Forecast Issue, Profit Perspectives: 2001, we were quite optimistic about the prospects for Lukoil Preferred ADR (LUKPY:OTC).
Lukoil had already rallied 270% since we initiated coverage... before dividends. The 1999 cash dividend of US$1.20 per ADR, which was declared on April 17, 2000, to ADR holders of record, equated to an 18% dividend yield vs. our recommended entry price...
When we first told you about LUKPY, the discount between the preferred and common shares was a ridiculous 60%. As predicted, this discount contracted as irrational Russophobia (itself a byproduct of the Asian financial crisis) finally began to dissipate.
But, while the discount did experience a massive one-time contraction, we thought there was still some upside leverage to the preferred stock.
The only big downside to owning the preferred stock was the lack of voting rights. But in Russia, voting rights really mean almost nothing. Furthermore, Taipan knew that the preferred would automatically be converted into de facto common stock if Lukoil neglected to pay 10% of the holding company profits to preferred shareholders.
Lukoil remains one of the largest oil companies in the world. Sales estimates for 2000 exceeded US$18 billion. Despite the high oil prices we were hit with last summer, Lukoil was still valued at just 4x 2000 earnings. And here’s the kicker: there were rumors that Lukoil would soon be converting those preferred shares into common shares on a one-for-one basis — an optimal outcome for LUKPY holders...
While there was an outside chance that Lukoil management would attempt to force conversion on unfavorable terms, Taipan felt that the underlying common shares were cheap enough to compensate for this risk. If Lukoil decided not to convert the preferred shares into common, it would be forced to pay out a huge dividend (10%+) to shareholders based on estimated holding company profits.
In short, we rated LUKPY a Hold.
Top of the pops
Well, we’ve just received a bulletin on the latest developments with LUKPY, which we originally recommended at $7 in 1999. And not only is the news good, it’s right in line with our forecast:
Lukoil just announced a $3.94 cash dividend per share and a 1:1 conversion from the ADR into ordinary shares! This is on top of the US$1.24 already paid to ADR holders.
What this means is that if you bought at $7, after the ex-dividend date, you would have received $5.18 per ADR in cash, which equates to a 74% yield on investment. Not too shabby, I’d say. And on top of this spectacular yield, you get converted into common shares on a 1:1 basis. Lukoil common is currently trading at $19.
Netting back the cash dividend, your real cost basis is $1.82 per ADR. After the conversion, you will have a stock with voting rights trading at $19.
Lukoil is about to list its common shares as ADRs on the New York Stock Exchange. This listing should raise the ADR price even further. Good timing for preferred ADR holders. Congratulations to our savvy Taipan investors!
Changes to Lukoil statute
At a session of Lukoil’s board of directors in Moscow held on April 6, it was decided that changes to the company statute will be proposed at an upcoming general meeting of shareholders scheduled for June 28, 2001. That is also when the conversion of preferred into common stock will be mooted. The move is seen as necessary to protect the rights of those holding common stocks. Even though preferred stocks make up only 9% of the authorized capital, their owners receive over a half of all dividends.
Under the proposed conversion, common and preferred shares will be equalized. The details of this process will be determined by the board of directors. If anyone holding preferred shares doesn’t agree with the terms of the conversion, the company will buy their shares for a price established by an independent appraiser, Russpromotsenka. The price is to be announced by May 15. You’ll want to keep a close eye on this one, folks.
Knocking it out of the industrial park
Though highly speculative in nature, the Lukoil pick has turned out to be a major winner for Taipan investors. This is exactly the kind of play that Taipan is known for. Stay tuned to this website and www.247profits.com for future communiqués on this and other profitable opportunities.
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