Yesterday we reported that the Evraz (LON: EVR) share price was down 35% on Ukraine war fears. That’s not quite, to put it mildly, exactly how it happened. There was gossip around the market that the substantial reported move – which was indeed 35% – was a result of those fears about war. That plus the possibility of sanctions against Russian businesses in general. Gossip often is a valid guide to what will happen to share prices but this wasn’t the case yesterday with Evraz.
Instead, Evraz shares started trading ex the demerger of the Raspadskaya coal business. When we add that value back in then Evraz shares rose on the day. Evraz is also up another 5% today.
The background to the demerger is that Evraz has long been a vertically integrated business. Ore and coal and steel works and steel marketing, all in that same business wrapper. But coal is rather going out of style these days, substantial investment funds now insist upon environmental, social and governance (ESG) goals. One of which is shying away from any investments in coal, seen as the dirtiest of the fossil fuels.
So, the presence of that coal business could have been lowering the Evraz valuation as a whole. The solution to which is to demerge it. Those who aren’t worried about ESG will value Raspadskaya at some multiple of its earnings, the ESG investors can then value Evraz independently of that discount. The two companies are worth more apart, because of their different appeals to investing groups that is, rather than as the one combined company.
Which is what indeed did happen. Raspadskaya is now separately listed and has its own valuation. Evraz has fallen in value as a result of that hiving off. But the combined valuation of the two – and the Raspadskaya shares are distributed to the Evraz shareholders – is higher than the starting point.
From all of which three lessons can be drawn. For ourselves of course it’s check three times, not just two, on what is being said in the market. The second is that corporate movements can and do change overall valuations. Some investors value exposure to coal at the present time, others don’t. So, moving a coal business out of an integrated steel one can be value additive.
The third is something perhaps of more relevance to investors. It’s not always possible to trust reported stock market prices. As we pointed out before varied tickers showed that Lloyds rose 45% one day. It didn’t, that was a specific preference share for technical reasons. The stock exchange itself reported that DMGT shares dropped 75% on the day the cash takeover bid succeeded. They didn’t – one class of stock converted into another. Here, with Evraz, the stock exchange price was showing that 35% decline – without any direct indicator that the demerger was now in place. Today’s quotation still shows yesterday’s decline without indication of why. Yes, obviously, we should know better ourselves but the point here is that prices in databases, even market quotations, can be misleading so don;t rely upon them too, too, much.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.