TCS Group - Trade Idea: Short-Term Market Underperform

TCS Group (Tinkoff) earlier this week announced a potential capital raise of up to $300 mln, the equivalent of around 10% of the current market cap and almost 40% of equity. The news was a major surprise, in our view, having not been flagged in any way by the management, which has typically suggested that the bank has various levers for managing its capital position without resorting to a capital raise. This comes on the back of an upgrade to the 2019 loan growth guidance from "above 40%" to "above 60%." We think the move raises questions about capital management, given that Tinkoff did not opt to further cut the dividend payout (it was cut from up to 50% of earnings to up to 30% in late December). The news also comes after March's $150 mln sell-down by founder and core shareholder, Oleg Tinkov, following the strong 2018 results. Tinkov has stated that he will participate in the capital raise, but we think this message should have been communicated up front when the potential placement was first announced. We also still don't know the extent to which he or the management will participate. He owns 44%, all in the form of Class B shares, while the management owns 6.5% in economic terms and a bit over 10% of Class A shares, on our estimates. An EGM will vote on the capital raise on June 25, after which, if approved, we expect the placement to be done fairly quickly. We expect the stock to underperform Russian financials and the Russian market into the placement and think the placement is likely to come at a discount to the market price given its size and timing.