Research Notes

TMK's IPO: Buy into the Middle of the Bookbuilding Range

The beneficial owner of TMK, TMK Steel, plans to float 23.2% of TMK stocks in an initial public offering. The bookbuilding range for shares and GDRs was set at $4.60-$5.40 and $18.40-$21.60, respectively, which puts the company's aggregate market cap at $4 bln to $4.7 bln.

TMK Steel, an investment unit, which is controlled by TMK BoD chairman Dmitry Pumpyansky, is to place 180 mln of its stocks in TMK on RTS and LSE and the other 4.5 mn shares at Rub 123 ($4.57) at a 0.8% discount to the minimal buyback price offered to the company's employees. Furthermore, Credit Suisse, one of the IPO arrangers, has an option to sell another 18 mln shares.

Thus, the proposed flotation volume, if the option is not exercised, will range from $828 mln to $972 mln. The pipe maker's IPO book will be closed on November 2, 2006.

At present, Dmitry Pumpyansky holds 100% of TMK through TMK Steel (70% of TMK), Bravecorp Limited (13.8%) and Tirelli Holdings Limited (16.2%). To boost its equity stake in TMK, TMK Steel borrowed $855.3 mln from TMK itself. IPO proceeds are planned to be used to repay this loan facility (for more details, see our Daily dated October 16, 2006).

On the one hand, the company chose the right time for an IPO, since demand for pipe products is on the rise thanks to the execution of major O&G projects and pipe makers are showing improvements in their profitability. Meanwhile, there are virtually no liquid pipe stocks on the market.

According to our estimates, TMK is worth around $4-4.4 bln or $4.50-$5.00 per common share. In our view, investors are advised to pick up TMK stocks in the offering in the $4.60-5.00 range.

During the offering TMK itself will not receive any cash, but the IPO is a positive for the company, increasing its transparency and improving its stock liquidity. As a result, TMK will obtain a market appraisal for its capitalization.

TMK stocks could become a good instrument in diversifying metal portfolios by liquid shares with a lower risk factor (compared to other Russian pipe producers). Steel prices are expected to go down, which should dampen the financial performance (EBITDA, sales and net profit) of steelmaking concerns. That said, pipe producers' earnings should remain high on the back of a favorable environment on the pipe market.

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Nataly Kocheshkova

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Sector: Metals
Company: TMK

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