Gamble of the week: a play on Kazakhstan's prosperity

published 2 March 2012

Living standards are soaring in Kazakhstan, the huge central Asian country born out of the old Soviet Union. Unemployment is modest and GDP growth is set to hit 6% in 2012, after averaging 8% over the past decade. At the state level, national debt is a mere 13% of output, thanks to a small current account surplus. How do they do it?

The reason seems to be that this autocracy borders Russia and China, and is therefore perfectly situated to satisfy demand from Europe and the Far East for its abundant supply of mineral and fossil fuel resources.

Kazakhstan also sits on top of the world's 11th largest proven oil and gas fields (over ten times Britain's reserves). It has the second largest uranium, chromium, lead, and zinc assets as well as an abundance of manganese and copper deposits, and ranks in the top ten for coal, iron and gold.

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It is an exporter of diamonds, wheat, textiles and livestock. This enormous natural wealth has triggered a building boom, with the population of Astana, the capital city, more than doubling in the last ten years. Not only have thousands of new houses been constructed for its citizens, but a host of weird and wonderful civic buildings continue to pop up.

Steppe Cement is a domestic supplier of 20% of Kazakhstan's cement needs. In a pre-close trading statement on 31 January, the firm revealed that 2011 revenues were up 31%, thanks to a combination of volume (6.5%) and price (23%) increases.

Steppe Cement (Aim: STCM)

I expect turnover to hit $94m for the year, helping the group to move back into the black in the second half of the year. Assuming there is no major economic wobble, Steppe's earnings should accelerate as capacity utilisation rises and sales jump to around $120m in 2012. I value the group on one times net tangible assets of $123.8m, or about 43p a share (at current exchange rates).

Two risks are Steppe's net borrowings of $52m and two new local competitors. Another possible problem is Kazakhstan's geopolitical risk. Inflation is running at 7.4% (although the rate is falling) and while the currency is broadly pegged to the dollar, the government was forced to implement a one-off 25% devaluation three years ago at the height of the banking crisis.

Westhouse Securities has a target price of 60p. Preliminary results are due out in April.

Rating: SPECULATIVE BUY at 32p (market capitalisation £58m)

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.