Citi upgraded a global stock after its move to cut its Russian stake — and gives it 27% upside

Published Wed, Dec 20 20236:34 PM EST

Citi has upgraded shares of Raiffeisen Bank International (RBI), one of the European banks most exposed to Russia, after it announced a complex transaction that will weaken its links to Russia. The Austrian lender said it would acquire a nearly 28% stake in Austrian construction company Strabag through its Russian subsidiary. The subsidiary would then transfer the newly acquired Strabag shares to its Vienna-listed parent as a dividend-in-kind payment. RAW-DE YTD line Extracting capital from Russia has become nearly impossible for foreign entities after the Russian government introduced new countersanctions on businesses from "unfriendly" countries earlier this year. Meanwhile, RBI has come under pressure after being placed on a Ukrainian "international sponsors of war" list — which set out to shame companies doing business in Russia. While the blacklist doesn't have any legal standing, it has piled public pressure on Raiffeisen to quit Russia, which the Austrian bank has said it is willing to do. To facilitate its exit from Russia, RBI said its Russian subsidiary would purchase 28.5 million Strabag shares at 52.98 euros per share for 1.5 billion euros ($1.65 billion), representing a 38% premium over the current share price. XD4-DE YTD line The stake in Strabag is being sold by Rasperia Trading Limited, a company connected to sanctioned Russian businessman Oleg Deripaska, which currently owns 27.8% of Strabag. The construction firm had also been searching for options to reduce Deripaska's stake. RBI also told shareholders that it intends to hold the Strabag shares for the long term and benefit from Strabag's profits. The construction firm reported a 480 million euro profit last year. Simon Nellis, an analyst at Citi, also believes RBI is likely to hold on to the shares owing to the size of the premium. "While the bank will use an internal valuation model to justify the carrying value, the market price, should it stay at this level or below, will limit Raiffiesen's ability to divest from the stake without incurring a loss," Nellis said in a note to clients on Dec. 20. The Wall Street bank's analyst also "conservatively" estimated that RBI's investment will contribute around 110 million euros annually to its earnings starting in 2025, increase its capital position and improve its earnings outlook. "The upward revision to earnings and dividend forecasts lead us to increase our target price to €21 from €17 previously," Citi's Nellis added, giving the stock 27% potential upside. "Coupled with management's reiterated commitment to deconsolidate the Russia business 'by way of a sale or, as a fall-back, a spin-off,' we upgrade our rating to Buy/High Risk from Neutral/High Risk previously." RBI noted that the transaction still requires regulatory approval and sanctions compliance due diligence before completion.