Over the past two week KASE index rose by 5.2%, outperforming the global indices. Shares of ENRC (+27,3%), Kcell (+6,1%), Kazkom (+6,4%) and KMG EP (+4,3%) were the winners.

Tactical ideas
ENRC shares were the winners over the past two weeks thanks to positive company specific news - publication of strong full-year 2012 production results and the information on a possible takeover of the company or a purchase of its assets. We believe ENRC shares are overbought now and expect the correction within the next two weeks, in part due to the news on a related party transaction. But we also believe the share price will rise in the run up to the publication of the 2012 financial results on March 30 due to speculative buying from traders in anticipation of higher financial results than the consensus estimate.

The strong trade data from China also had a positive impact on the shares of mining companies. In January exports from China rose by 25% YoY, and imports increased by 28.8% YoY,  both well above the analyst consensus.

Kcell shares appreciated after the announcement of the planned dividend for the 2H2012 (T162 per share) and on the news of the slowdown of market expansion of Tele2 in Kazakhstan. The announced dividend payout exceeded our forecast (T155 per share), but this does not explain the rally. We believe more certainty over the dividend size mainly drove the stock price. We recommend to fix a long position for the investors with aggressive return expectations. However, given the lack of alternatives, Kcell shares remain one of the most attractive investments for investors with realistic return expectations.

Over the past week ENRC shares surged by 10.4%. The company's output in the ferroalloys and iron ore divisions came above the consensus estimate and marginally above our estimates. We believe that the key catalysts for 2013 will outweigh risks and have higher chances of realization.

    - The start of production at the Frontier mine, expected in April-May, will help convince the market in the company's project execution capacity in Africa. The mine will add 40kt of copper cathode output this year.
    - Sale or joint development of copper assets in Africa with Glencore or with other investors will be another positive catalyst for ENRC, allowing the company to share project risks and capital investments with the partner.
    - The potential purchase of the stake in the company by a third-party or one of the existing shareholders is a long-discussed scenario in the market, and in this scenario the investors can receive an up to 50% upside to the current price.
    - The additional share placement (for about $560mn) until 2013 end to meet the FTSE-100 free float requirement of 25% will help the company reduce its leverage and can be directed toward financing of development projects. The increased free float also could help reduce the influence of the founding shareholders on the strategic decisions of the miner.

The key risks to our current valuation are a slump in commodity prices, higher capital and M&A expenditures, breach of debt covenants, poor project execution, exclusion from FTSE-100, and deterioration of corporate governance issues.     

We have lowered our 12-month target price from 540 GBp (T1270) to 340 GBp (T810).
In the one year horizon we expect current price to converge to the target price, however in the shorter horizon we maintain a tactical Buy recommendation on the stock. We expect the market price to increase in the short run and the spread between the market price and the fair value of the stock to widen.

KazMunaiGas EP
In the last two weeks KMG EP's common and preferred shares were trading in the range of T16,200-16,900 and T12,400-12,500 per share, respectively. The company did not release public announcements during this period. Trading volumes were low. Investors are anticipating a dividend announcement. The meeting of the Board of Directors is usually held in the mid-March, when the directors recommend a size of the annual dividend. We expect the dividend for 2012 to be at the level of that for 2011, or T1,300 per share, and believe that a probability of a special dividend is zero.

In the beginning of the next month we expect the company to publish FY2012 financial results. We estimate 2012 revenues at $5.3bn, up 11% YoY thanks to a hike of export sales. We calculate net income at $1.47bn, up 6% YoY.

We revised our valuation of KMG EP’s common and preferred shares to reflect a change in the methodology of Brent price calculation and cost of equity forecast. As a result, we raised our 12M target price on KMG EP’s common and preferred shares to T17,700 ($19.6 per GDR) and T12,950 per share, respectively.

In the last 14-day period GDRs jumped by 6.7% in London trading, noticeably outperforming the common shares on KASE due to lower liquidity. KMG EP will lack fundamental triggers this year that could pull shares up, in our view. However, in anticipation of a dividend we recommend to "Hold" both common and preferred shares.

Last week Zhaikmunai announced about the GDR buyback program. The share buyback decision signals to the market Zhaikmunai's conviction that its GDRs are undervalued, in our opinion. The effect on the market price of GDRs in the short to medium run will depend on the size of the program which the company is yet to announce. The repurchase of GDRs is another step in distributing the company's cash among shareholders. Last year the company adopted a dividend policy planning to pay at least 20% of net income to its shareholders. We expect a dividend for 2012 at $0.23 per GDR, implying a dividend yield of 2% to the last closing price. We cover Zhaikmunai with a 12-month target price of $12.3 per GDR and a Buy recommendation.

Shares of KazTransOil traded in the narrow range of T803-815 per share after the National Bank of Kazakhstan allowed the local pension funds to trade the shares of the oil transportation company. The share price volatility declined over the past two weeks and we do not expect the share price to increase in the short term horizon as the major investors in the stock, the local pension funds, can trade the stock only within a band of T750-850 per share. We maintain our 'Sell' recommendation on the stock with  a 12-month target price of T779 per share.

On January 31 Kcell held the first earnings call after the IPO. 4Q2012 results contained no surprises and confirmed the company's leading position on the market. However, the pressure of the intensifying competition on the bottom line became more obvious. Kcell stock rose by 11% after the earnings release or by 30% since the IPO. The company's management plans to distribute in 2Q2013 a 162 tenge dividend per share, equivalent of a 7.9% dividend yield. Going forward the company plans to payout at least 70% of net income as dividend. We view Kcell as an attractive stock for income seekers, rather than for investors looking for significant capital gains. The company generates stable profit but has limited growth potential in the tougher market. We estimate the 12-month target price at $15.1 and recommend to 'Buy' the stock.

*Halyk Finance was acting as a Co-manager of the Kcell IPO.

After the Board of Directors' decision, announced on January 25, over the possible stock buyback within the next three years the price of Kazakhtelecom common shares stabilized at the level of T17,000. During the meeting last week the company's management disclosed us that about a half of large capital expenditures, planned for 2013, under the LTE/GSM and FTTH projects would be financed with debt. Thus, the company, in our opinion, will have substantial cash reserves available for the possible stock buyback. However, the terms of the repurchase remain unclear. Therefore, we do not include this scenario into our valuation. We recommend to 'Hold' the Kazakhtelecom stock with a 12-month target price of T18,850 per common stock and T14,965 per preferred stock.

Over the past two weeks shares of Kazakhmys traded in the T1702-1799 per share range and rose by just 2.9%, in line with the market trend. The company's production results released on February 1 did not contain surprises. Copper cathode equivalent output declined by 2% YoY, but came 1.5% above our forecast. In 2012 the company continued to mine more ore (+12.2% YoY) to offset the declining grades (-5.9% YoY). Last week Kazakhmys confirmed that it was currently engaged in talks about the sale of its 50% holding in Ekibastuz GRES-1. We estimate that the value of the 50% stake could be in the range of $650-860mn. The impact of the sale announcement is neutral for the stock at this stage, taking into account that negotiations are at an early  stage and the company has yet to share with the market its plans on the use of sale proceeds. We would prefer that the sale proceeds be directed toward payment of a special dividend to shareholders, which could be as much as T187-250 per share assuming a 100% payout ratio, on our estimates. The company's growth projects are fully funded now and the company does not need additional cash to fund its medium size projects. If the company once again spends its free cash flows on the purchase of non-core assets, we believe the current discount for corporate governance will widen and the Kazakh miner will continue to underperform global peers. We maintain a 'Hold' recommendation on Kazakhmys with a 12-month target price of T1720 per share. We do not recommend long term investors to buy the shares as the company lacks clear corporate strategy. We view the stock as an instrument of receiving short term speculative profits only.

Kazkommertsbank shares fell by 17.6% from the local peak of $2.98 on January 25 after a 75% rally since the beginning of the year. The only news over the last month was the regulator's decision on January 25 to grant two largest shareholders of the bank - Central Asian Investment Company (CAIC) and Alnair Capital, "permission to acquire a significant participation" in the bank. The permission issuance should be considered as a pure formality, we believe, because it was required under the new legislation. Similar permissions were issued on the same day to various large shareholders of other banks.

Recall that CAIC, Alnair and the bank founder Nurzhan Subkhanberdin possess an option to purchase Samruk-Kazyna's interest in the bank, which was acquired in May 2009 at a price of $2.9 per GDR through a new share issuance. The option expires in May 2014. We believe Samryk-Kazyna will try to sell the stock with a positive return to the cost of $2.9 per GDR. Details about the option are not disclosed, but we believe the stock market price will be used as a strike price. Therefore, the Kazkommertsbank stock may present a speculative opportunity for the ones willing to bet on the scenario of the market price exceeding $2.9 per GDR during Samruk-Kazyna's sale of its interest to other large bank shareholders. However the uncertainty of this scenario remains high. Meanwhile, we do not see in the near future any apparent factors for the improvement of the bank's fundamental position. We recommend to 'Hold' the stock with a 12-month target price of $3.4 per share.

Weeks ahead
On February 28, Kazakhmys will release preliminary financial results for the full-year 2012. We do not expect a positive earnings surprise and expect the actual results to be broadly in line with the consensus estimates. We will publish Kazakhmys earnings preview on February 25.

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