We initiate publication of periodic reports, analyzing the most important aspects of the privatization program for potential investors. This review provides a brief description of privatization plans and financial analysis of the most attractive companies in the privatization program, designated for an IPO.

At the end of December 2015, the Kazakh Government approved a new comprehensive privatization plan for 2016 – 2020. Early in January, the final list of the privatized state property objects has been defined. The main objectives of the privatization program were announced to be an increase in asset management efficiency via the reduction of state control, a decline in budget spending, attraction of private investments and initiative, and the ability to release internal resources to ensure stable economic growth of the country during the crisis. The program is targeting a 15% reduction in quasi-public sector organizations of the republican property and a transfer of 5% of the municipal property organizations to the competitive environment. 

List of privatized companies and method of sale. The privatization list includes 65 largest companies, owned by the state directly or through Samruk-Kazyna, Baiterek and KazAgro. In addition, a list of subsidiaries and affiliates of Samruk-Kazyna, consisting of 173 companies, has been approved for privatization together with an updated list of 545 objects of state property being transferred to a competitive environment through privatization, public-private partnerships, or liquidation. After evaluation, these assets will be sold through electronic auctions using an electronic platform of the state property register of the Ministry of Finance. Full list of companies for privatization is available at the following link.

According to the privatization plan, 10 of the largest companies owned by Samruk-Kazyna will be publicly listed via an IPO. These include "NC KazMunaiGas" JSC, "Kazakhstan Temir Zholy" JSC, "Kazatomprom" JSC, "Kazpost" JSC, "Air Astana" JSC, as well as 5 companies belonging to "Samruk Energo" JSC (GRES-1, GRES-2 and Bogatyr-Komir) and «Tau-Ken Samruk" JSC (Kazzinc and ShalkiyaZinc).

Potential investors. According to the decree of the President of the Republic of Kazakhstan, shares of at least five most attractive companies of Samruk-Kazyna should be listed in Astana International financial center with at least 25% in a free float. IPO will be available for a wide range of investors (domestic and international) in the organized market of the Republic of Kazakhstan.

Overall, we view these IPO plans as a succession of the “People’s IPO” program, under which KazTransOil and KEGOC were publicly listed on the stock market. Samruk-Energy, Kazatomprom and Kazakhstan Temir Zholy were to be listed next. Recently, the “People’s IPO” program was de facto suspended due to the unfavorable economic situation and declining appetite of the Kazakhstan’s population for equity investments.

 With regard to a direct sale of assets, Chinese companies have already expressed willingness to participate in the privatization in Kazakhstan. This was recently confirmed by the Ambassador of China in Kazakhstan. Amid the outflow of foreign investments from emerging markets, Chinese investors remain the most creditworthy customers.

Overall, the most affordable way to participate in the privatization program for a wide range of investors, in our opinion, will be through the IPO.

Investment attractiveness of issuers. Based on the financial results and business models of the companies, we believe that Kazatomprom, Air Astana and Kazzinc are the most attractive in “as is” state. KazMunaiGas, Kazakhstan Temir Zholy, Samruk-Energo and Kazpost could also become strong investment stories subject to certain conditions (including large-scale restructuring of non-core assets, increase in operational efficiency and stabilization of financial situation).

Kazatomprom is a national uranium producer, consistently developing a full cycle of fuel production for nuclear power stations. The company controls all uranium deposits in the country through joint ventures with major global players, such as Cameco, Areva, and Rosatom. Thanks to the use of technologies that do not require conventional ore mining, Kazatomprom has very low costs of uranium production, ensuring stable operating cash flows and a positive trend of financial ratios. Low oil and other commodity prices have no significant impact on the company, owing both to the use of long-term forward contracts for uranium sales and a different pricing cycle.

Air Astana is a national carrier, which has a monopoly among domestic companies for international flights. This right may be lost due to the loss of state control as a result of the privatization. The company flies to more than 60 domestic and international destinations and has a fleet of 30 aircrafts including Boeing 767-300ER, Boeing 757-200, Airbus A320 and Embraer E190. In recent years, Air Astana has been regularly receiving awards from international agencies as the best company in Central Asia. Lower oil prices have a positive effect on the profitability of the company thanks to lower jet fuel costs. In addition, high quality of the management and the absence of non-core assets have a positive effect on efficiency and value of the company.

NC KazMunaiGas controls more than a quarter of Kazakhstan’s oil and gas production and holds a dominant position in oil refining and oil and gas transportation. The company generates regular cash flows denominated in foreign currency, which is a major advantage in face of the increased risk of Tenge devaluation. High leverage and low oil prices are the main risks for the company. Moreover, on its way to IPO the company will have to complete fairly large restructuring of its massive asset portfolio. The main step in this direction should be the buyout of KMG EP from the public market. This option is already under consideration of the KMG EP’s shareholders. In the future, the company is likely to face an optimization and restructuring to adapt to a “low oil prices era”.

Kazzinc is a major producer of zinc, copper, gold and associated metals. Kazzinc also generates regular foreign currency cash flows from commodity exports. Low leverage ensures stable financial position, and the devaluation of Tenge in 2015 should have a positive impact on the company's profitability due to the reduction of operating costs. Controlled by the largest international commodity trader, Glencore, the company has a long experience in international management and improvement of operational efficiency.

Possible schedule of privatization and IPO. At the moment, the government is selecting consultants to lead assets sale. This process is expected to be completed by the end of February and first state property sale transactions should be completed within a year. We note that mainly foreign consulting companies are being invited to the provision of consulting services.

At the moment exact timing of each company’s IPO is not defined. It is possible that a massive listing of companies will be timed to the factual opening of the Astana International financial center, scheduled for early 2018. In addition, the economic situation can improve in the next two years, positively affecting the valuation of listed companies.

Currently, the companies designated for an IPO are in the process of a large-scale asset restructuring and reorganization. Depending on the scale of restructuring and asset size, this process may take quite a long time, from a few months to several years.

In general, we do not expect major placements before 2017-18. The next company to be listed through the People’ IPO was Samruk-Energo. Kazakhstan Temir Zholy and Kazatomprom were supposed to be the following. Thus, these companies may be more prepared for listing procedures.

Major execution risks of privatization program. In our opinion, success of the program can be obstructed by many problems resulting from external and internal factors.

The unfavorable economic situation in Kazakhstan and in the world has a negative impact on the investment attractiveness of privatized assets. As a result, their sales price may be significantly lower than in the period of high prices for oil and other natural resources.

Due to deteriorating financial condition of the domestic investors, both individual and corporate, we expect relatively low demand on their part. We expect the domestic demand to remain depressed on the back of weak economic outlook and lack of confidence in the national currency.

We also do not expect a very high demand from foreign investors (both strategic and portfolio), due to a high level of uncertainty both in the domestic market and in Russia and China, our largest neighbors.

In addition, investors already have a negative experience associated with the People’s IPO, especially since the main acting names remain the same. The People's IPO deadlines have been constantly delayed, and only two companies were listed publicly – KazTransOil and KEGOC. IPOs of other companies, Samruk-Energo, Kazatomprom and KTZh, have been constantly postponed until the introduction of a new program.

Furthermore, not all of the objects of privatization, in particular - the "second tier" companies, can be equally attractive to investors due to the different characteristics of their operations and efficiency. This can lead to an uneven demand and adversely affect valuations. Also, the level of preparation for the IPO is different for each company, and some of them need serious restructuring and business optimization to improve their investment attractiveness.

 Our view.

We believe the privatization to be an important part of the structural reforms currently undertaken by the government. Key objectives of privatization are to reduce the state's share in the market economy, to strengthen the role of private initiative and competition, to develop securities market, to increase the efficiency of the privatized companies, to reduce the government spending on the state-owned companies, to attract foreign investment, and so on.

Due to economic situation in Kazakhstan, the selling price of privatized assets will be significantly lower than in the period of high oil prices. We believe that this should not be an obstacle to privatization. Oil prices are expected to remain low in the long run. However, the delay of privatization may adversely affect the course of structural reforms and growth of non-oil economy sector in Kazakhstan.

In general, given the past experience of public listings of state-owned companies and high risks of execution of the new program, there are still many ambiguities and misunderstandings of individual nuances of the program on the part of the various departments. In particular, although the official decree stipulated that not less than 25% share of each of the most attractive companies should be offered to the market, direct executors have already voiced an alternative view, according to which the investors will be able to get hold of no more than 25%.

In addition, the interest of Chinese investors in the privatized assets can cause some concerns due to the fact that they mainly represent companies associated with the state, rather than private investors. In this case, there is a risk of substitution of the Kazakh state control for the Chinese state control.