GPB_Russian Utilities Initiation_231118_watermark

vk.com/id446425943

COMPANIES

vk.com/id446425943

INITIATION OF COVERAGE

RusHydro

Shareholder value is driven by sustainability of regulatory support for Far East operations

RU

SSI

Regulatory support for Far East operations should trigger healthy group-wide FCFY and DY if sustained over a multi-year period as currently mulled by the government.

Operations

Valuable core business (hydro generation ~30 GW) coupled with not self-sufficient Far East operators, additionally supported by uplift to RusHydro’s capacity prices in other regions.

Positives

Solid potential value of core assets base (hydro generation)

Approaching start of positive FCFY (~2019-20) and FCFY-to-CoE premium (~2021-22).

Regulatory support for Far East operations via an uplift to RusHydro's capacity prices in other regions (RUB 35 bln in 2018).

Potential prolongation of regulatory support until 2028 is being considered by the government following a proposal by the President (RIA Novosti, Kommersant).

Practically applied dividend payout of 50% of IFRS net income, with potential protection against a dividend decline via setting a dividend floor as the past 3Y average.

Negatives

Substantial sensitivity of profits and FCF to regulatory support for Far East operations. Unclear value of regulatory support in the medium term.

Risk of further increase in Far East capex, as the Energy Ministry envisions the addition of 1.3 GW of capacity at a total cost of ~RUB 150 bln as part of the “modernization” program.

Forward contract to compensate VTB for the gap between the market and the “target” value of its stake in RusHydro (55 bln shares) in 1H22 currently has negative value.

Downward pressure on dividends (calculated as 50% of net profit) due to the nonmonetary writedowns of the value of fixed or financial assets.

Risk of delays to introduction of thermal plants in the Far East (Sakhalin-2, Sov. Gavan).

Unclear timing and costs of recovery of Zagorskaya PSS-2 (accumulated costs of ~RUB 70 bln). Risk of subsequent writedowns that may affect net profit and dividends.

Exclusion from MSCI Russia Index (November 2018) to trigger fund outflow (~$65 mln).

Valuation (2018-2026)

FCFY-to-CoE premium: 2021-26.

DY-to-CoD premium: 2021-26.

Note: Share prices as of closure 20-Nov-2018

TICKER	HYDR RX
Currency	RUB
Target price	0.70
Upside	32%
Recommendation	Overweight
MCap, bln	226
Share price	0.53
52-week high	0.85
52-week low	0.52

Source: Bloomberg, Gazprombank estimates

	SHAREHOLDERS
	Russian Federation		60.6%
	VTB Bank		13.3%
	Avitrans		6.0%
	Quasi-treasury		0.9%
	Free-float		19.2%

Source: company data

12M PRICE PERFORMANCE

140%
120%
100%
80%
60%		MOEX INDEX
		HYDR
40%	Jan-18	Mar-18	May-18	Jul-18
Nov-17					Sep-18

Source: Bloomberg

Chart 43. RusHydro: FCF profile	Chart 44. RusHydro: FCFY and DY profile
EBITDA (lhs), capex (lhs), FCFY (rhs)-for RusHydro hydro generation	FCFY (lhs), DY (lhs) and dividend payout vs IFRS net profit (rhs)

150	EBITDA, Capex										30%
125									FCFY (line)
	RUB bln
100											20%
75
50											10%
25
0											0%
-25
-50											-10%
-75
-100											-20%
	2016	2017	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E

	RETAIL	30%
	SUBSIDIES
	(FAR EAST)
	NEW	15%
	GENERATION
	HYDRO
	GENERATION:
	OLD	0%
	CAPEX
	UES OF EAST
	(W/O
	SUBSIDIES)	-15%
	FCFY

FCFY and DY

Dividend

100%

(columns)

payout (line)

75%

50%

25%

0%

2016

2017

2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

2026E

-25%

-50%

FCF YIELD (LHS)

DIVIDEND YIELD (LHS)

DIVIDEND PAYOUT (RHS)

Source: company data, Gazprombank estimates

Source: company data, Gazprombank estimates

32

vk.com/id446425943

NOVEMBER 23, 2018 RUSSIA > EQUITY RESEARCH > UTILITIES

Table 5. RusHydro forecast (IFRS-based) and valuation, RUB bln or RUB per share

P&L	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E	TV'2027
Hydro generation (& new Far East units)	108.8	108.5	107.1	114.9	120.5	128.3	135.5	147.9	155.9	160.8	165.1	169.4	173.6	177.9
UES of East (w/o subsidies)	139.6	150.3	162.7	175.5	168.5	162.9	164.7	166.4	168.2	170.0	171.3	172.5	173.8	175.0
Subsidies (for Far East)	13.2	12.4	14.3	17.3	32.7	35.0	35.0	30.0	25.0	20.0	15.0	10.0	5.0	0.0
Retail	79.2	82.2	87.0	88.7	61.8	60.4	61.0	61.7	62.3	63.0	63.5	64.0	64.5	65.0
Other & Eliminations	(13.9)	(11.4)	(9.2)	(5.0)	(2.8)	(3.0)	(3.0)	(3.0)	(3.0)	(3.0)	(3.0)	(3.0)	(3.0)	(3.0)
Revenue	326.9	342.0	361.8	391.3	380.9	383.6	393.3	403.1	408.5	410.8	411.8	412.9	413.9	414.9
Hydro generation (& new Far East units)	63.1	57.3	59.4	73.2	74.0	77.8	84.3	89.7	100.5	107.6	111.0	114.3	117.7	121.1
UES of East (w/o subsidies)	3.8	3.0	(1.5)	6.6	(9.4)	(8.5)	(8.5)	(8.5)	(8.5)	(8.5)	(8.5)	(8.5)	(8.5)	(8.5)
Subsidies (for Far East)	13.2	12.4	14.3	17.3	32.7	35.0	35.0	30.0	25.0	20.0	15.0	10.0	5.0	0.0
Retail	0.7	1.1	2.9	2.9	1.6	1.3	1.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4
Other & Eliminations	(1.5)	(4.3)	1.2	5.2	2.3	(1.0)	(0.8)	(0.5)	(0.3)	0.0	0.0	0.0	0.0	0.0
EBITDA	79.3	69.6	76.3	105.2	101.2	104.7	111.4	112.1	118.2	120.5	118.9	117.2	115.6	114.0
Hydro generation (& new Far East units)	(11.4)	(12.2)	(12.5)	(13.6)	(14.7)	(16.7)	(16.7)	(17.0)	(17.3)	(17.4)	(17.6)	(17.6)	(17.6)	(17.6)
UES of East	(5.2)	(7.3)	(7.6)	(7.7)	(8.0)	(8.6)	(8.7)	(8.8)	(8.9)	(9.0)	(9.0)	(9.0)	(9.0)	(9.0)
Retail	(0.7)	(0.7)	(0.8)	(0.8)	(0.2)	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)	(0.3)
Other & Eliminations	(1.0)	(1.2)	(1.5)	(2.0)	(2.2)	(2.0)	(2.0)	(2.0)	(2.0)	(2.0)	(2.0)	(2.0)	(2.0)	(2.0)
Depreciation	(18.2)	(21.3)	(22.5)	(24.1)	(25.0)	(27.5)	(27.6)	(28.0)	(28.4)	(28.7)	(28.9)	(28.9)	(28.9)	(28.9)
EBIT	61.1	48.3	53.8	81.1	76.2	77.2	83.8	84.1	89.7	91.7	90.0	88.3	86.8	85.2
Finance (costs) / income	(0.1)	(1.3)	2.6	0.9	1.3	(2.0)	(2.3)	(2.8)	(2.9)	(0.9)	(0.3)	0.2	0.7	1.2
One-offs (non-cash): operational	(35.7)	(14.0)	(18.7)	(26.8)	(28.0)	(28.0)	(26.5)	(25.0)	(20.0)	(15.0)	(11.3)	(7.5)	(3.8)	0.0
One-offs (non-cash): financial	(0.2)	(1.8)	0.0	0.0	(13.9)	(11.0)	(5.5)	0.0	0.0	0.0	0.0	0.0	0.0	0.0
EBT	25.2	31.2	37.7	55.1	35.5	36.2	49.6	56.2	66.9	75.9	78.5	81.1	83.8	86.4
Income tax	(4.2)	(6.2)	(10.5)	(15.4)	(13.1)	(9.9)	(11.6)	(11.8)	(14.0)	(15.9)	(16.5)	(17.0)	(17.6)	(18.1)
Net profit (before minorities)	21.0	24.1	27.2	39.8	22.5	37.3	43.5	44.4	52.8	59.9	62.0	64.1	66.2	68.2
Minority	(1.2)	1.5	4.4	0.5	1.6	(1.9)	(2.1)	(2.0)	(2.2)	(2.4)	(2.3)	(2.2)	(2.2)	(2.0)
Net profit (reported)	19.8	25.6	31.5	40.2	24.0	35.4	41.4	42.4	50.6	57.5	59.7	61.8	64.0	66.2
Net profit (adj.)	50.2	36.2	44.9	70.0	61.5	59.4	64.4	64.2	68.6	71.8	70.9	70.0	69.1	68.2
Leverage, RUB bln															TV'2027
Net (Debt) / Cash (year end)	(117.3)	(142.6)	(149.4)	(132.4)	(99.4)	(87.4)	(89.4)	(76.0)	(44.5)	(14.3)	12.2	37.0	60.1	81.4	(228.1)
Net Debt or (Cash) / EBITDA (year end)	1.5	2.0	2.0	1.3	1.0	0.8	0.8	0.7	0.4	0.1	(0.1)	(0.3)	(0.5)	(0.7)	2.0
Net Debt or (Cash) incl. VTB forward / EBITDA	1.9	2.5	2.3	1.5	1.3	1.1	1.1	0.9	0.6	0.4	0.1	(0.1)	(0.3)	(0.5)
Multiples
FCF Yield	3%	-10%	-10%	7%	4%	-6%	7%	15%	23%	24%	24%	24%	23%	23%
DY	2%	3%	6%	9%	5%	8%	9%	9%	11%	12%	13%	13%	14%	14%
EV/EBITDA (incl. VTB forward)	1.8	1.9	5.3	3.8	3.7	3.4	3.1	3.1	2.7	2.4	2.2	2.0	1.8	1.7
PE (adj)	4.6	6.4	5.2	3.3	3.8	3.9	3.6	3.6	3.4	3.2	3.3	3.3	3.3	3.4
Dividend, RUB/s															TV'2027
DPS: regular	0.012	0.01	0.03	0.05	0.03	0.04	0.05	0.05	0.06	0.07	0.07	0.07	0.07	0.08	0.61
DPS: special (leverage optimization)															0.68
DPS: special (non-core assets sale)															0.00
DPS: total	0.01	0.01	0.03	0.05	0.03	0.04	0.05	0.05	0.06	0.07	0.07	0.07	0.07	0.08	1.29
Dividend / Net profit	26%	24%	48%	49%	48%	50%	50%	50%	50%	50%	50%	50%	50%	50%
Dividend / FCF	69%	neg	neg	122%	118%	neg	131%	62%	48%	51%	54%	56%	59%	62%
Cash flow, RUB bln															TV'2027
EBITDA	79.3	69.6	76.3	105.2	101.2	104.7	111.4	112.1	118.2	120.5	118.9	117.2	115.6	114.0
Tax	(4.2)	(6.2)	(10.5)	(15.4)	(13.1)	(9.9)	(11.6)	(11.8)	(14.0)	(15.9)	(16.5)	(17.0)	(17.6)	(18.1)
Working capital (change)	0.0	(1.2)	0.0	0.0	(7.8)	0.0	(0.4)	(0.4)	(0.2)	(0.1)	(0.0)	(0.0)	(0.0)	(0.0)
Capex	(61.6)	(78.6)	(79.2)	(61.0)	(71.7)	(104.8)	(79.5)	(61.5)	(47.6)	(47.0)	(46.5)	(46.0)	(45.5)	(45.0)
FCF (to EV)	13.4	(16.4)	(13.5)	28.9	8.7	(10.0)	20.0	38.4	56.3	57.5	55.9	54.1	52.5	50.9	444.9
Interest CF	(6.0)	(6.8)	(10.5)	(12.7)	0.9	(5.0)	(4.3)	(4.2)	(3.5)	(2.0)	(0.6)	0.5	1.5	2.4
FCF (to Equity)	7.4	(23.3)	(24.0)	16.2	9.6	(15.0)	15.7	34.1	52.8	55.5	55.3	54.6	54.0	53.3
Discounting parameters															TV'2027
Period for discounting, years	DCF					(1.4)	(0.4)	0.6	1.6	2.6	3.6	4.6	5.6	6.6	7.6
	DDM					(0.4)	0.6	1.6	2.6	3.6	4.6	5.6	6.6	7.6	8.6
Discounting factor	DCF						1.03	0.93	0.82	0.72	0.64	0.56	0.49	0.44	0.38
	DDM					1.03	0.92	0.79	0.68	0.59	0.51	0.44	0.38	0.33	0.28
DCF, RUB bln
DCF							20.5	35.6	46.0	41.4	35.5	30.3	25.9	22.1	170.7
PT (DCF), RUB/s			PT (w-average, rounded), RUB/s								Valuation parameters		DDM	DCF	Other
Fair EV of core assets, RUB bln	428		PT		RUB/s	Weight		Comment			CoE		15.8%
Non-core assets	1		DDM		0.68	70%					WACC			13.4%
Forward contract with VTB	(30)		DCF		0.72	30%					TG (Dividends)		3.5%
Net (debt) / Cash (discounted), end 2018	(87)		Result (rounded)		0.70	100%					TG (FCF)			2.0%	0.0%
Equity, RUB bln	312
# of shares: current (bln)	426
# of shares: new (bln)	13
# of shares: (quasi)-treasury (bln)	(4)
# of shares: effective, total	436
PT (DCF), RUB	0.72

Source: company data, Gazprombank estimates

33

vk.com/id446425943

NOVEMBER 23, 2018	RUSSIA > EQUITY RESEARCH > UTILITIES

INITIATION OF COVERAGE

Inter RAO

RU

SSI

Strong FCFY and balance sheet should eventually translate into solid dividends

Inter RAO’s strong FCFY and balance sheet alongside a partly streamlined ownership structure (after the buyback of RusHydro's stake and partial buyback of FSK's stake) should eventually lead to an increased dividend payout and solid DY.

Operations

Russia’s largest thermal generator (electrical capacity ~33.5 GW) with exposure to other sectors (electricity retail in Russia, electricity export, utilities outside Russia).

Positives

Capacity additions under CSA completed in 2018.

FCFY-to-CoE premium from 2017 until 2026.

Strong balance sheet with major net cash position.

Partial streamlining of ownership structure (via the buyback of RusHydro’s stake and partial buyback of FSK’s stake) should additionally stimulate an increased dividend payout, as the majority of dividends would remain within the Inter RAO/RNG perimiter.

Negatives

Modest historical dividend payout (25% of IFRS net income) implied modest historical DY.

Unclear timing of potential increase in dividend payout.

Risks of additional capex (on top of “modernization” program) M&A

Hypothetical deviation of strategic priorities of principal shareholder (RNG, ~28%) from those of minority owners.

Valuation (2018-2026)

 FCFY-to-CoE premium: 2018-26.

Note: Share prices as of closure 20-Nov-2018

TICKER	IRAO RX
Currency	RUB
Target price	5.40
Upside	42%
Recommendation	Overweight
MCap, bln	397
Share price	3.8
52-week high	4.4
52-week low	3.2

Source: Bloomberg, Gazprombank estimates

	SHAREHOLDERS
		Rosneftegaz (RNG)		27.6%
		Inter RAO Capital		29.4%
		Federal Grid		9.2%
		Company
		Free-float		33.7%

Source: company data

12M PRICE PERFORMANCE

140%
120%
100%
80%
60%		MOEX INDEX
		IRAO
40%	Jan-18	Mar-18	May-18	Jul-18
Nov-17					Sep-18

Source: Bloomberg

Chart 45. Inter RAO: FCF profile	Chart 46. Inter RAO: FCFY and DY vs. IFRS net profile
EBITDA (lhs), capex (lhs), FCFY (rhs) – for Inter RAO Power Generation	FCFY (lhs), DY (lhs) and dividend payout (rhs)

150

EBITDA, Capex

FCFY

30%

30%

100%

FCFY and DY

Dividend

INT'L AND

125

RUB bln

(line)

(columns)

payout (line)

ELIMNATIONS

100

RUSSIA

75

15%

RETAIL

15%

50%

CO-

50

GENERATION

25

INTERRAO-

EG: NEW

0

0%

INTERRAO-

0%

2016

2017

2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

2026E

0%

-25

EG: OLD

CAPEX

-50

-75

2016 2017 2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

2026E

-15%

FCFY

-15%

-50%

DIVIDEND PAYOUT (RHS)

FCF YIELD (LHS)

DIVIDEND YIELD (LHS)

Source: company data, Gazprombank estimates

Source: company data, Gazprombank estimates

34

vk.com/id446425943

NOVEMBER 23, 2018 RUSSIA > EQUITY RESEARCH > UTILITIES

Table 6. Inter RAO forecast (IFRS-based) and valuation, RUB bln or RUB per share

P&L	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E
InterRAO-EG	138.6	147.6	149.1	156.6	165.7	174.7	174.7	180.1	188.1	193.3	192.8	183.0	170.7	173.4
Co-generation	67.8	76.6	79.3	83.6	84.9	89.0	88.0	87.0	86.0	85.0	83.8	82.5	81.3	80.0
Russia retail	404.3	450.9	511.1	564.0	628.6	657.0	662.7	668.5	674.2	680.0	685.0	690.0	695.0	700.0
Trading	47.8	56.7	80.5	81.0	58.6	71.1	70.9	70.6	70.3	70.0	68.8	67.5	66.3	65.0
Int'l assets	34.7	43.2	52.9	32.1	26.8	26.6	28.7	30.8	32.9	35.0	36.3	37.5	38.8	40.0
Other & Eliminations	(31.3)	(33.9)	(40.9)	(49.1)	(47.6)	(36.5)	(39.6)	(42.8)	(46.0)	(49.1)	(49.1)	(49.1)	(49.1)	(49.1)
Revenue	662.0	741.1	832.0	868.2	917.0	981.9	985.3	994.1	1,005.5	1,014.2	1,017.4	1,011.4	1,002.9	1,009.3
InterRAO-EG	23.7	29.1	36.1	53.6	56.7	60.8	60.8	66.3	72.3	74.7	71.4	58.9	44.1	44.5
Co-generation	6.9	10.5	9.7	13.7	13.5	16.2	15.4	14.6	13.8	13.0	12.5	12.0	11.5	11.0
Russia retail	7.1	9.4	13.9	15.1	17.8	21.8	20.3	18.9	17.4	16.0	15.8	15.5	15.3	15.0
Trading	2.9	4.6	9.6	10.2	7.4	9.7	8.8	7.8	6.9	6.0	5.9	5.8	5.6	5.5
Int'l assets	5.0	6.4	7.3	10.8	6.1	7.9	7.4	7.0	6.5	6.0	6.1	6.3	6.4	6.5
Other & Eliminations	(6.0)	(4.5)	(4.3)	(10.6)	(7.3)	(3.1)	(3.6)	(4.1)	(4.5)	(5.0)	(5.1)	(5.3)	(5.4)	(5.5)
EBITDA	39.7	55.4	72.3	92.8	94.2	113.2	109.1	110.5	112.4	110.7	106.5	93.1	77.5	77.0
InterRAO-EG	(13.3)	(10.5)	(11.7)	(11.7)	(11.0)	(13.5)	(13.5)	(13.5)	(13.5)	(13.5)	(13.5)	(13.5)	(13.5)	(13.5)
Co-generation	(6.1)	(6.1)	(5.1)	(5.1)	(5.1)	(5.8)	(5.8)	(5.9)	(5.9)	(6.0)	(6.0)	(6.0)	(6.0)	(6.0)
Russia retail	(1.2)	(1.3)	(2.2)	(2.2)	(1.7)	(2.4)	(2.4)	(2.4)	(2.5)	(2.5)	(2.5)	(2.5)	(2.5)	(2.5)
Trading	(0.1)	(0.1)	(0.1)	(0.2)	(0.2)	(0.1)	(0.1)	(0.1)	(0.1)	(0.1)	(0.1)	(0.1)	(0.1)	(0.1)
Int'l assets	(2.2)	(2.1)	(3.1)	(2.6)	(2.0)	(3.8)	(3.6)	(3.4)	(3.2)	(3.0)	(3.0)	(3.0)	(3.0)	(3.0)
Other & Eliminations	(0.9)	(1.1)	(1.4)	(1.1)	(1.1)	(1.1)	(1.1)	(1.1)	(1.1)	(1.1)	(1.1)	(1.1)	(1.1)	(1.1)
Depreciation	(23.7)	(21.2)	(23.6)	(22.9)	(21.0)	(26.6)	(26.5)	(26.4)	(26.3)	(26.2)	(26.2)	(26.2)	(26.2)	(26.2)
EBIT	15.9	34.2	48.7	69.9	73.2	86.6	82.6	84.0	86.1	84.5	80.3	66.9	51.3	50.8
Finance (costs) / income	(1.5)	(4.7)	(3.2)	(0.8)	6.2	5.9	5.5	7.4	8.6	9.1	8.9	8.0	6.5	4.6
One-offs (non-cash): operational	(31.1)	(9.9)	(23.4)	(0.6)	(14.4)	(5.0)	(4.5)	(4.0)	(3.5)	(3.0)	(2.3)	(1.5)	(0.8)	0.0
One-offs (non-cash): financial	(10.4)	(2.6)	2.1	(3.6)	(1.0)	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
EBT	(27.1)	17.0	24.2	64.9	64.0	87.5	83.6	87.4	91.1	90.6	86.9	73.4	57.0	55.4
Income tax	3.1	(7.2)	(0.4)	(3.6)	(9.5)	(18.4)	(17.5)	(18.4)	(19.1)	(19.0)	(18.3)	(15.4)	(12.0)	(11.6)
Net profit (pre-minorities)	(24.0)	9.8	23.8	61.3	54.4	69.1	66.0	69.1	72.0	71.6	68.7	58.0	45.1	43.7
Minority	1.0	(1.9)	(1.2)	(0.6)	(0.6)	(0.7)	(0.7)	(0.7)	(0.7)	(0.7)	(0.7)	(0.6)	(0.5)	(0.4)
Net profit (reported)	(23.1)	7.8	22.6	60.8	53.9	68.4	65.4	68.4	71.3	70.9	68.0	57.4	44.6	43.3
Net profit (adj.)	14.0	26.7	35.8	58.9	64.8	73.1	69.6	72.2	74.8	73.9	70.4	59.2	45.7	43.7
Net Debt (RUB bln)															TV'2027
Net (Debt) / Cash, year end, RUB bln	(12.8)	(31.5)	(11.9)	78.4	97.0	122.0	184.5	244.9	302.4	354.1	399.0	433.7	459.5	489.2	(150.1)
Net Debt or (Cash) / EBITDA (year end)	0.3	0.6	0.2	(0.8)	(1.0)	(1.1)	(1.7)	(2.2)	(2.7)	(3.2)	(3.7)	(4.7)	(5.9)	(6.4)	2.0
Multiples
FCF Yield	-2%	-1%	13%	15%	11%	25%	28%	29%	30%	30%	28%	24%	19%	18%
Dividend yield	0.0%	0.0%	0.5%	3.9%	3.4%	4.3%	5.1%	6.5%	7.8%	8.9%	8.6%	7.2%	5.6%	5.4%
EV/EBITDA (adj)	7.4	5.4	4.2	2.8	2.3	1.8	1.6	1.2	0.9	0.5	0.3	0.0	(0.3)	(0.5)
PE (adj)	20.0	10.5	7.8	4.7	4.3	3.8	4.0	3.9	3.7	3.8	4.0	4.7	6.1	6.4
Dividend
DPS: regular		0.00	0.02	0.15	0.13	0.16	0.20	0.25	0.30	0.34	0.33	0.27	0.21	0.21	1.45
DPS: special (leverage optimization)															8.61
DPS: special (sale non-core assets)															-
DPS, RUB/s: total			0.02	0.15	0.13	0.16	0.20	0.25	0.30	0.34	0.33	0.27	0.21	0.21	10.06
Dividend / Net profit	0%	1%	8%	25%	25%	25%	31%	38%	44%	50%	50%	50%	50%	50%
Dividend / FCF	neg	neg	4%	26%	30%	17%	18%	23%	27%	30%	30%	30%	30%	31%
Cash flow, RUB bln
EBITDA	39.7	55.4	72.3	92.8	94.2	113.2	109.1	110.5	112.4	110.7	106.5	93.1	77.5	77.0
Tax	-	(7.2)	(0.4)	(3.6)	(9.5)	(18.4)	(17.5)	(18.4)	(19.1)	(19.0)	(18.3)	(15.4)	(12.0)	(11.6)
Working capital change	0.0	(15.2)	(4.4)	(8.6)	(23.9)	(2.7)	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Capex	(41.0)	(36.0)	(28.8)	(34.7)	(31.5)	(25.0)	(17.0)	(17.3)	(17.7)	(18.0)	(18.5)	(19.0)	(19.5)	(20.0)
FCF (to EV)	(1.3)	(3.0)	38.8	45.8	29.3	67.2	74.6	74.8	75.6	73.7	69.7	58.7	46.0	45.3	396.7
Interest (CF)	(3.1)	(1.2)	(3.8)	(3.7)	2.1	2.4	3.2	5.1	7.0	9.1	8.9	8.0	6.5	4.6	-
FCF ( to Equity)	(4.4)	(4.2)	35.0	42.1	31.4	69.6	77.8	79.8	82.6	82.8	78.6	66.7	52.5	49.9
Discounting parameters															TV'2020
Period for discounting, years	DCF					(1.4)	(0.4)	0.6	1.6	2.6	3.6	4.6	5.6	6.6	7.6
	DDM					(0.4)	0.6	1.6	2.6	3.6	4.6	5.6	6.6	7.6	8.6
Discounting factor	DCF						1.03	0.93	0.82	0.72	0.63	0.56	0.49	0.43	0.38
	DDM					1.03	0.91	0.79	0.68	0.59	0.51	0.44	0.38	0.33	0.28
DCF, RUB bln															TV'2020
DCF: total							76.5	69.3	61.7	53.0	44.3	32.8	22.7	19.7	152.1
TP (DCF), RUB/s				TP (w-average, rounded), RUB/s					Valuation parameters		DDM	DCF	Other
Fair EV of core assets, RUB bln		532		TP		RUB/s	Weight		CoE		15.8%
Non-core assets		-		DDM		4.2	70%		WACC			13.4%
Net (debt) / Cash (discounted), end 2018		82		DCF		8.4	30%		TG (Dividends)		1.5%
Equity, RUB bln		614		Result (rounded)		5.4	100%		TG (FCF)			2.0%	0.0%
# of shares: current		104
# of shares: new		-
# of shares: (quasi)-treasury		(31)
# of shares: effective, total		73
TP (DCF), RUB/s		8.4

Source: company data, Gazprombank estimates

35

vk.com/id446425943

NOVEMBER 23, 2018	RUSSIA > EQUITY RESEARCH > UTILITIES

INITIATION OF COVERAGE

Unipro

RU

SSI

FCFY-to-CoE premium to start in 2020, but should not last beyond 2024 due to expiration of CSAs

The planned re-launch of a new unit at Beryozov TPP (2H19) should trigger a hike in FCFY and DY in 2020, which, however, should run off after 2024 with the expiration of CSAs for Beryozov (2024) and other new units (2020-21).

Operations

One of Russia’s most efficient inter-regional thermal gencos (electrical capacity ~11.2 GW) currently focused on recovery of the damaged new unit at Beryozov TPP (0.8 GW), which is planned to be re-started in 2H19.

Positives

Approaching FCFY-to-CoE premium (2020) on the back of the planned re-launch of the new unit at Beryozov TPP (0.8 GW, 2H19).

Potentially strong dividend payout (>80% of FCF) after the re-launch of the new unit at Beryozov TPP. Specific dividend approach is to be revealed in 2019.

Solid dividends even prior to the re-launch of new unit at Beryozov TPP (annual DPS during 2018-2019 = RUB 0.22 per share p.a., with DY=~8%).

Limited corporate governance risks due to control by a Uniper.

Negatives

Limited period of FCFY-to-CoE premium (2020-21) due to expiration of CSAs for new units at Shatura TPP (Sep. 2020), Yaiva TPP (Dec. 2020), Surgut TPP-2-7 (July 2021), Surgut TPP-2-8 (Aug. 2021) and Beryozov TPP (Oct. 2024).

Risks of delays or cost over-runs in the re-launch of new unit at Beryozov TPP.

Ambitious short-term valuations: EV/EBITDA'18 > 6.0x.

Valuation (2018-2026)

Note: Share prices as of closure 20-Nov-2018

TICKER	UPRO RX
Currency	RUB
Target price	2.90
Upside	5%
Recommendation	Neutral
MCap, bln	173
Share price	2.8
52-week high	2.9
52-week low	2.5

Source: Bloomberg, Gazprombank estimates

	SHAREHOLDERS
	Uniper		83.7%
	Free-float		16.3%

Source: company data

12M PRICE PERFORMANCE

140%
120%
100%
80%		MOEX INDEX
60%		UPRO
40%	Jan-18	Mar-18	May-18	Jul-18
Nov-17					Sep-18

Source: Bloomberg

FCFY-to-CoE premium: 2020-23. FCFY to decline in 2022 driven by the start of CSA expirations.

DY-to-CoD premium: 2019-24.

Chart 47. Unipro: FCF profile	Chart 48. Unipro: FCFY and DY profile
EBITDA (lhs), capex (lhs), FCFY (rhs)	FCFY (lhs), DY (lhs) and dividend payout vs IFRS net profit (rhs)

40	EBITDA, Capex									30%	30%
									FCFY
	RUB bln									(line)
20										15%	15%
0										0%	0%
-20										-15%	-15%
2016	2017	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E
	EBITDA ("NEW")			EBITDA ("OLD")				CAPEX		FCFY

FCFY and DY

Dividend

100%

(columns)

payout (line)

50%

0%

2016

2017

2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

2026E

-50%

FCF YIELD (LHS)

DIVIDEND YIELD (LHS)

DIVIDEND PAYOUT (RHS)

Source: company data, Gazprombank estimates

Source: company data, Gazprombank estimates

36

vk.com/id446425943

NOVEMBER 23, 2018 RUSSIA > EQUITY RESEARCH > UTILITIES

Table 7. Unipro forecast (IFRS-based) and valuation, RUB bln or RUB per share

P&L (IFRS), RUB bln: Unipro	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E	TV'2027
Revenue electricity: old	56.4	55.7	54.4	54.8	51.0	48.7	49.7	51.0	53.8	55.1	56.3	57.4	58.5	60.6
Revenue electicity: new	19.2	18.4	18.0	19.0	21.9	23.1	27.1	39.6	38.3	35.3	36.2	33.5	19.3	19.9
Revenue electricity	75.6	74.1	72.4	73.9	72.9	71.9	76.8	90.6	92.1	90.4	92.5	90.9	77.8	80.5
Heat revenue	1.1	1.2	1.2	1.3	1.3	1.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4	1.4
Revenue other (incl. reselling)	2.1	2.4	3.1	2.9	2.4	2.1	1.6	1.2	0.9	0.7	0.6	0.5	0.4	0.3
Revenue (before subsidies)	78.8	77.7	76.7	78.0	76.5	75.3	79.7	93.2	94.5	92.6	94.5	92.8	79.6	82.2
Subsidies	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Revenue	78.8	77.7	76.7	78.0	76.5	75.3	79.7	93.2	94.5	92.6	94.5	92.8	79.6	82.2
Fuel costs electricity, old	(31.0)	(31.9)	(29.9)	(31.9)	(28.1)	(27.8)	(28.3)	(28.8)	(29.4)	(30.0)	(30.6)	(31.2)	(31.6)	(32.8)
Fuel costs heat, old	(0.7)	(0.7)	(0.7)	(0.7)	(0.6)	(0.6)	(0.6)	(0.6)	(0.7)	(0.7)	(0.7)	(0.7)	(0.7)	(0.7)
Fuel costs, new	(4.8)	(5.0)	(4.9)	(5.4)	(4.9)	(5.0)	(5.8)	(7.1)	(7.4)	(7.8)	(8.1)	(8.5)	(8.8)	(9.1)
Fuel costs,old and new	(36.5)	(37.6)	(35.5)	(37.9)	(33.6)	(33.4)	(34.8)	(36.5)	(37.5)	(38.5)	(39.4)	(40.3)	(41.1)	(42.7)
Purchased power & Re-selling	(1.0)	(1.2)	(2.0)	(1.9)	(1.3)	(1.4)	(1.1)	(0.9)	(0.8)	(0.6)	(0.5)	(0.4)	(0.4)	(0.3)
Heat transportation	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Water payment	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Gross profit	41.3	38.9	39.2	38.2	41.6	40.5	43.8	55.8	56.2	53.5	54.5	52.1	38.1	39.3
Non-fuel Opex: Old plants	(9.2)	(10.0)	(13.7)	(12.0)	(11.6)	(10.7)	(10.6)	(9.8)	(10.2)	(10.6)	(10.9)	(11.2)	(11.5)	(11.6)
Non-fuel Opex: new plants	(2.4)	(2.5)	(2.6)	(2.8)	(2.9)	(3.1)	(4.1)	(5.9)	(6.2)	(6.4)	(6.6)	(6.8)	(6.9)	(7.4)
Cost of subsidies	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Non-fuel Opex	(11.6)	(12.5)	(16.3)	(14.8)	(14.5)	(13.8)	(14.7)	(15.7)	(16.4)	(16.9)	(17.5)	(18.0)	(18.4)	(19.0)
EBITDA, old plants	16.6	14.3	11.3	11.5	12.0	11.0	11.5	13.2	15.0	15.2	15.5	15.8	16.1	16.9
EBITDA, new plants	12.0	10.9	10.5	10.9	14.0	15.0	17.1	26.6	24.7	21.2	21.5	18.3	3.6	3.4
EBITDA, reselling / other	1.0	1.1	1.1	1.0	1.1	0.7	0.4	0.3	0.2	0.1	0.1	0.1	0.0	0.0
EBITDA	29.7	26.4	22.9	23.4	27.1	26.7	29.1	40.1	39.9	36.5	37.0	34.1	19.7	20.3
Depreciation: Old plants	(8.1)	(5.1)	(5.6)	(4.6)	(3.5)	(3.1)	(3.1)	(3.1)	(3.1)	(3.1)	(3.1)	(3.1)	(3.1)	(3.1)
Depreciation: New plants	(1.9)	(1.9)	(1.9)	(2.0)	(2.4)	(2.9)	(3.3)	(3.5)	(3.5)	(3.5)	(3.5)	(3.5)	(3.5)	(3.5)
Depreciation	(9.9)	(6.9)	(7.5)	(6.6)	(6.0)	(6.0)	(6.5)	(6.7)	(6.7)	(6.7)	(6.7)	(6.7)	(6.7)	(6.7)
EBIT	19.7	19.5	15.4	16.8	21.2	20.7	22.6	33.5	33.2	29.8	30.4	27.4	13.1	13.6
Finance (costs) / income	2.1	1.9	0.7	0.4	0.9	0.3	0.8	0.5	1.2	1.4	1.3	1.4	1.4	0.6
One-offs (cash)	0.0	0.0	2.8	5.7	20.4	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
One-offs (non-cash): operational	(4.0)	(0.4)	(0.9)	(15.2)	(0.4)	(0.3)	(0.2)	(0.1)	(0.0)	(0.0)	(0.0)	(0.0)	(0.0)	(0.0)
One-offs (non-cash): financial	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
EBT	17.8	20.9	18.0	7.6	42.1	20.7	23.3	33.8	34.4	31.2	31.6	28.9	14.4	14.2
Income tax	(3.4)	(4.1)	(4.3)	(2.4)	(8.5)	(4.3)	(4.9)	(7.1)	(7.2)	(6.6)	(6.6)	(6.1)	(3.0)	(3.0)
Net profit (pre-minorities)	14.4	16.9	13.8	5.2	33.6	16.3	18.4	26.7	27.2	24.6	25.0	22.8	11.4	11.2
Minority	(0.2)	(0.0)	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Net profit (reported)	14.2	16.8	13.8	5.2	33.6	16.3	18.4	26.7	27.2	24.6	25.0	22.8	11.4	11.2
Net profit (adj)	17.7	17.2	12.8	13.5	17.5	16.6	18.5	26.8	27.2	24.7	25.0	22.8	11.4	11.2
Leverage, RUB bn															TV'2027
Net (Debt) / Cash (year end)	27	14	10	3	7	10	6	15	17	16	18	17	7	8	(41)
Net Debt or (Cash) / EBITDA (year end)	(0.9)	(0.5)	(0.4)	(0.1)	(0.2)	(0.4)	(0.2)	(0.4)	(0.4)	(0.4)	(0.5)	(0.5)	(0.3)	(0.4)	2.0
Multiples			`
FCF Yield	7%	3%	6%	7%	14%	4%	6%	16%	17%	15%	15%	14%	8%	7%
DY	14%	10%	7%	8%	8%	8%	11%	15%	16%	14%	14%	13%	7%	6%
EV/EBITDA	5.2	6.0	7.2	7.2	6.3	6.3	5.8	4.1	4.1	4.4	4.4	4.7	8.4	8.3
PE (adj)	9.8	10.1	13.6	12.8	9.9	10.4	9.4	6.5	6.4	7.0	6.9	7.6	15.2	15.4
Dividend, RUB / s															TV'2027
DPS: regular	0.38	0.28	0.20	0.23	0.22	0.22	0.29	0.43	0.43	0.39	0.40	0.36	0.18	0.18	1.70
DPS: special (leverage optimization)															0.77
DPS: special (non-core assets sale)															-
DPS: total	0.38	0.28	0.20	0.23	0.22	0.22	0.29	0.43	0.43	0.39	0.40	0.36	0.18	0.18	2.47
Dividend / Net profit (nominal)	168%	104%	90%	277%	42%	86%	101%	100%	100%	100%	100%	100%	100%	100%
Dividend / Net profit (adj)	135%	102%	97%	106%	80%	84%	100%	100%	100%	100%	100%	100%	100%	100%
Dividend / FCF	188%	300%	117%	127%	58%	222%	187%	97%	94%	93%	93%	93%	87%	87%
Cash Flow, RUB bn															TV'2027
NOPAT: old plants	6.9	7.5	4.5	5.4	6.7	6.2	6.6	8.0	9.4	9.5	9.8	10.0	10.3	10.9
NOPAT: new	8.2	7.3	6.8	7.0	9.2	9.6	10.9	18.2	16.7	13.9	14.2	11.6	0.0	(0.1)
NOPAT: reselling / other	0.8	0.9	0.9	0.8	0.9	0.5	0.3	0.2	0.1	0.1	0.1	0.0	0.0	0.0
NOPAT	16.0	15.7	12.2	13.2	16.7	16.4	17.9	26.4	26.2	23.6	24.0	21.7	10.3	10.8
CapEx: Maintenance	0.0	0.0	(3.5)	(4.1)	(4.5)	(4.5)	(4.6)	(4.6)	(4.7)	(4.8)	(4.8)	(4.9)	(4.9)	(5.0)
CapEx: New	(15.2)	(17.7)	(8.7)	(9.6)	(10.2)	(12.0)	(10.4)	0.0	0.0	0.0	0.0	0.0	0.0	0.0
CapEx	(15.2)	(17.7)	(12.2)	(13.7)	(14.7)	(16.5)	(15.0)	(4.6)	(4.7)	(4.8)	(4.8)	(4.9)	(4.9)	(5.0)
Working Capital Red./ (Incr.)	0.0	0.0	0.0	0.0	0.0	0.0	(0.1)	(1.2)	(0.1)	0.0	0.0	0.0	0.0	0.0
FCF; old plants	15.0	12.6	6.7	6.0	5.7	4.9	5.1	5.3	7.7	7.9	8.1	8.3	8.5	9.0	99.7
FCF; new plants	(5.1)	(8.6)	(0.0)	(0.6)	1.4	0.5	3.8	21.8	20.2	17.5	17.7	15.2	3.6	3.4	37.7
FCF: reselling / other	0.8	0.9	0.9	0.8	0.9	0.5	0.3	0.2	0.1	0.1	0.1	0.0	0.0	0.0	0.2
FCF: cash one-offs	0.0	0.0	2.2	4.5	16.2	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
FCF (to EV)	10.7	4.9	9.7	10.7	24.1	5.9	9.3	27.3	28.1	25.5	25.8	23.5	12.0	12.4	137.6
Interest (CF)	2.0	0.9	0.9	0.6	0.2	0.4	0.6	0.3	0.9	1.0	1.0	1.1	1.0	0.4
FCF (to Equity)	12.7	5.8	10.6	11.3	24.3	6.3	9.9	27.7	29.0	26.5	26.8	24.5	13.1	12.8
Discounting parameters
Period for discounting, years	DCF					(1.4)	(0.4)	0.6	1.6	2.6	3.6	4.6	5.6	6.6	0.6
	DDM					(0.4)	0.6	1.6	2.6	3.6	4.6	5.6	6.6	7.6	1.6
Discounting factor	DCF						1.02	0.93	0.83	0.74	0.65	0.58	0.52	0.46	0.41
	DDM					1.03	0.92	0.80	0.70	0.61	0.54	0.47	0.41	0.36	0.31
DCF
DCF: Old plants							5.2	4.9	6.4	5.8	5.3	4.8	4.4	4.1	40.6
DCF: New plants							3.9	20.3	16.7	12.8	11.6	8.8	1.8	1.6	15.4
DCF: Reselling / other							0.4	0.2	0.1	0.1	0.0	0.0	0.0	0.0	0.1
DCF: total							9.5	25.4	23.2	18.7	16.9	13.6	6.2	5.7	56.1
TP (DCF), RUB bln or RUB/s			TP (w-average, rounded), RUB/s							Valuation parameters			DDM	DCF	Other
EV, RUB bln	175		TP		RUB/s	Weight				CoE			14.5%
Non-core assets	-		DDM		2.70	40%		DDM is a floor for PT		WACC				12.5%
Net (debt) / Cash (discounted), end 2018	7		DCF		2.90	60%				TG (Dividends)			4.0%
Equity, RUB bln	182		Result (rounded)		2.90	100%				TG (FCF): "old" assets				3.5%	0.0%
# of shares: current	63									TG (FCF): "new" assets				3.5%
# of shares: Ord: New	-
# of shares: Ord	63
# of shares: Ord: treasury	-
# of shares: Pref	-
# of shares: effective, total	63
TP (DCF), RUB	2.89

Source: company data, Gazprombank estimates

37

vk.com/id446425943

NOVEMBER 23, 2018	RUSSIA > EQUITY RESEARCH > UTILITIES

INITIATION OF COVERAGE

Enel Russia

RU

SSI

Solid FCFY-to-CoE premium unlikely to resume in medium term due to CSA expiration and wind capacity investments

Medium-term FCFY should be undermined by expiration of all thermal CSAs (after 2020) coupled with investments in new wind capacity, even though they are to be supported by CSA-like arrangements.

Operations

A foreign-controlled thermal inter-regional generator (electrical capacity ~9.4 GW) that plans to launch two wind-powered units in 2020-21 and is trying to divest its main coal-fired asset (Reftinsk TPP, ~3.8 GW).

Positives

FCFY-to-CoE premium achieved in 2017 on the back of "7-10 years" uplift to CSAs.

Solid dividend payout (65% of adjusted IFRS net income) to be applied to results of 2018-20.

Two wind-power projects ("wind parks", +0.3 GW, 2020-21) received regulatory financial support via a mechanism similar to CSA with 15 years duration.

Limited corporate governance risks due to control by Enel group.

Negatives

Approaching expiration of current thermal CSAs (Nevynomyssk TPP (Dec. 2020), Sredneural TPP (Dec. 2020)), triggering a substantial decline in EBITDA in 2021.

FCF to descend into negative territory in 2020-21 on the back of investments in windbased generating capacity even despite CSA-like support for new wind units.

Uncertain outcome of the intended sale of Reftinsk TPP; uncertain approach to use of proceeds if the sale materializes.

Valuation (2018-2026)

 DY-to-CoD premium: 2018-20, 2025-26.

Note: Share prices as of closure 20-Nov-2018

TICKER	ENRU RX
Currency	RUB
Target price	1.05
Upside	-8%
Recommendation	Underweight
MCap, bln	40
Share price	1.1
52-week high	1.7
52-week low	1.0

Source: Bloomberg, Gazprombank estimates

	SHAREHOLDERS
		Enel S.p.A			56.4%
		PFR Partners				19.0%
		Fund
		Prosperity Capital			8.2%
		Management
		Free-float				16.4%

Source: company data

12M PRICE PERFORMANCE

140%
120%
100%
80%		MOEX INDEX
60%		ENRU
40%	Jan-18	Mar-18	May-18	Jul-18	Sep-18
Nov-17

Source: Bloomberg

Chart 49. Enel Russia: FCF profile	Chart 50. Enel Russia: FCFY and DY profile
EBITDA (lhs), capex (lhs), FCFY (rhs)	FCFY (lhs), DY (lhs) and dividend payout vs. adjusted IFRS net profit (rhs)

20	EBITDA, Capex									FCFY (line)		30%	30%
	RUB bln
10
												15%	15%
0
												0%	0%
-10
-20												-15%	-15%
	2016	2017	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E
		EBITDA ("NEW")				EBITDA ("OLD")			CAPEX			FCFY

FCFY and DY (columns)

2016

2017

2018E

2019E

2020E

2021E

2022E

2023E

FCF YIELD (LHS)

DIVIDEND PAYOUT (RHS)

Dividend payout			100%
		(line)
			50%
			0%
2024E	2025E	2026E	-50%

DIVIDEND YIELD (LHS)

Source: company data, Gazprombank estimates

Source: company data, Gazprombank estimates

38

vk.com/id446425943

NOVEMBER 23, 2018 RUSSIA > EQUITY RESEARCH > UTILITIES

Table 8. Enel Russia forecast (IFRS-based) and valuation, RUB bln or RUB per share

P&L (IFRS), RUB bln: Enel Russia	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E	TV'2027
Revenue electricity: old	50.7	54.1	51.2	51.5	51.3	50.7	51.2	52.2	54.4	55.3	56.1	56.9	57.7	59.4
Revenue electicity: new	9.1	9.5	9.5	10.0	13.4	13.6	14.0	14.2	8.7	13.3	13.6	13.9	14.2	14.5
Revenue electricity	59.8	63.6	60.7	61.5	64.7	64.3	65.2	66.4	63.0	68.6	69.8	70.9	71.9	73.8
Heat revenue	4.2	3.8	3.6	0.3	0.3	0.3	2.7	2.8	3.0	3.1	3.2	3.3	3.4	3.5
Revenue other (incl. reselling)	5.7	6.9	6.7	10.4	9.4	8.7	7.6	6.7	5.9	5.3	4.7	4.3	3.9	3.5
Revenue (before subsidies)	69.7	74.4	71.0	72.2	74.4	73.3	75.4	75.9	71.9	76.9	77.7	78.4	79.1	80.9
Subsidies	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Revenue	69.7	74.4	71.0	72.2	74.4	73.3	75.4	75.9	71.9	76.9	77.7	78.4	79.1	80.9
Fuel costs electricity, old	(30.5)	(32.0)	(34.2)	(32.3)	(31.5)	(31.2)	(31.3)	(31.3)	(31.6)	(31.8)	(32.0)	(32.2)	(32.3)	(33.0)
Fuel costs heat, old	(2.9)	(3.0)	(3.3)	(3.1)	(3.1)	(3.1)	(3.1)	(3.1)	(3.2)	(3.2)	(3.3)	(3.3)	(3.3)	(3.4)
Fuel costs, new	(3.5)	(3.7)	(4.1)	(4.0)	(4.0)	(4.1)	(4.2)	(4.3)	(4.4)	(4.6)	(4.7)	(4.9)	(5.0)	(5.1)
Fuel costs,old and new	(36.9)	(38.8)	(41.5)	(39.4)	(38.5)	(38.3)	(38.5)	(38.7)	(39.1)	(39.6)	(40.0)	(40.3)	(40.6)	(41.6)
Purchased power & Re-selling	(5.7)	(6.5)	(6.2)	(6.4)	(5.5)	(5.5)	(5.2)	(4.9)	(4.6)	(4.3)	(4.0)	(3.7)	(3.4)	(3.2)
Heat transportation	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Water payment	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Gross profit	27.1	29.2	23.2	26.4	30.3	29.4	31.7	32.2	28.2	33.1	33.7	34.4	35.1	36.1
Non-fuel Opex: Old plants	(9.1)	(9.7)	(12.1)	(11.5)	(11.3)	(12.1)	(12.7)	(13.2)	(13.5)	(13.1)	(13.5)	(13.9)	(14.2)	(14.5)
Non-fuel Opex: new plants	(1.2)	(1.3)	(1.3)	(1.4)	(1.5)	(1.6)	(1.6)	(1.7)	(2.3)	(3.6)	(3.7)	(3.9)	(3.9)	(4.2)
Cost of subsidies	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Non-fuel Opex	(10.3)	(11.0)	(13.4)	(12.9)	(12.8)	(13.7)	(14.3)	(14.9)	(15.8)	(16.7)	(17.2)	(17.7)	(18.1)	(18.7)
EBITDA, old plants	12.4	13.1	5.2	4.9	5.8	4.7	6.9	7.3	9.1	10.3	10.6	10.9	11.3	11.9
EBITDA, new plants	4.4	4.6	4.1	4.7	8.0	8.0	8.2	8.2	1.9	5.1	5.2	5.2	5.2	5.1
EBITDA, reselling / other	0.0	0.5	0.5	4.0	3.8	3.1	2.3	1.7	1.3	1.0	0.8	0.6	0.4	0.3
EBITDA	16.8	18.2	9.8	13.5	17.6	15.8	17.4	17.3	12.3	16.4	16.5	16.7	17.0	17.4
Depreciation: Old plants	(5.4)	(4.8)	(4.2)	(1.5)	(1.9)	(2.3)	(2.3)	(2.3)	(2.3)	(2.3)	(2.3)	(2.3)	(2.3)	(2.3)
Depreciation: New plants	(1.6)	(1.6)	(1.6)	(1.6)	(1.6)	(1.6)	(1.8)	(2.1)	(2.7)	(3.1)	(3.1)	(3.1)	(3.1)	(3.1)
Depreciation	(7.0)	(6.4)	(5.8)	(3.1)	(3.5)	(4.0)	(4.1)	(4.5)	(5.1)	(5.4)	(5.4)	(5.4)	(5.4)	(5.4)
EBIT	9.9	11.8	4.0	10.4	14.1	11.8	13.3	12.8	7.3	11.0	11.1	11.3	11.6	12.0
Finance (costs) / income	(3.2)	(2.7)	(5.8)	(4.8)	(3.0)	(2.7)	(2.4)	(2.7)	(4.1)	(6.1)	(5.6)	(5.1)	(4.7)	(4.3)
One-offs (cash)	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
One-offs (non-cash): operational	0.0	(2.0)	(58.7)	(0.1)	(0.1)	(0.2)	(0.1)	(0.1)	(0.0)	(0.0)	(0.0)	(0.0)	(0.0)	(0.0)
One-offs (non-cash): financial	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
EBT	6.7	7.1	(60.5)	5.5	10.9	8.9	10.7	10.1	3.1	4.9	5.5	6.2	6.9	7.7
Income tax	(1.7)	(1.5)	11.9	(1.1)	(2.4)	(1.9)	(2.3)	(2.1)	(0.7)	(1.0)	(1.2)	(1.3)	(1.4)	(1.6)
Net profit (pre-minorities)	4.9	5.6	(48.6)	4.4	8.5	7.0	8.5	8.0	2.5	3.8	4.4	4.9	5.4	6.1
Minority	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Net profit (reported)	4.9	5.6	(48.6)	4.4	8.5	7.0	8.5	8.0	2.5	3.8	4.4	4.9	5.4	6.1
Net profit (adj)	4.9	7.1	(1.4)	4.4	8.7	7.2	8.5	8.0	2.5	3.8	4.4	4.9	5.4	6.1
Leverage, RUB bn															TV'2027
Net (Debt) / Cash (year end)	(19)	(21)	(25)	(20)	(18)	(20)	(22)	(34)	(52)	(49)	(46)	(43)	(41)	(39)	(35)
Net Debt or (Cash) / EBITDA (year end)	1.1	1.2	2.5	1.5	1.0	1.3	1.3	2.0	4.3	3.0	2.8	2.6	2.4	2.3	2.0
Multiples			`
FCF Yield	11%	11%	-2%	3%	16%	12%	4%	-17%	-35%	10%	11%	11%	12%	13%
DY	5%	7%	0%	6%	13%	12%	14%	13%	4%	6%	8%	9%	11%	13%
EV/EBITDA	3.5	3.3	6.4	4.6	3.4	3.7	3.5	4.0	6.8	5.5	5.3	5.1	4.9	4.6
PE (adj)	8.2	5.6	neg	9.1	4.6	5.6	4.7	5.0	16.1	10.5	9.2	8.2	7.4	6.6
Dividend, RUB / s															TV'2027
DPS: regular	0.06	0.08	0.00	0.07	0.14	0.13	0.16	0.15	0.05	0.07	0.09	0.10	0.12	0.15	1.36
DPS: special (leverage optimization)															(0.13)
DPS: special (non-core assets sale)															-
DPS: total	0.06	0.08	0.00	0.07	0.14	0.13	0.16	0.15	0.05	0.07	0.09	0.10	0.12	0.15	1.23
Dividend / Net profit (nominal)	40%	51%	0%	55%	60%	66%	66%	65%	66%	65%	70%	75%	80%	85%
Dividend / Net profit (adj)	40%	40%	0%	55%	59%	65%	65%	65%	65%	65%	70%	75%	80%	85%
Dividend / FCF	46%	65%	neg	235%	82%	95%	338%	neg	neg	65%	72%	80%	88%	98%
Cash Flow, RUB bn															TV'2027
NOPAT: old plants	5.2	6.5	0.8	2.7	3.0	1.8	3.6	3.9	5.3	6.3	6.5	6.8	7.0	7.6
NOPAT: new	2.1	2.4	2.0	2.4	5.0	5.0	5.1	4.8	(0.8)	1.6	1.7	1.7	1.7	1.6
NOPAT: reselling / other	0.0	0.4	0.4	3.1	3.0	2.5	1.8	1.4	1.0	0.8	0.6	0.5	0.4	0.3
NOPAT	7.3	9.3	3.2	8.2	11.1	9.3	10.5	10.1	5.6	8.7	8.8	8.9	9.1	9.5
CapEx: Maintenance	0.0	0.0	(3.2)	(3.4)	(5.5)	(5.7)	(5.8)	(5.9)	(5.9)	(6.0)	(6.1)	(6.3)	(6.4)	(6.5)
CapEx: New	(8.6)	(10.5)	(4.9)	(5.1)	(0.7)	(1.1)	(5.4)	(13.7)	(16.3)	0.0	0.0	0.0	0.0	0.0
CapEx	(8.6)	(10.5)	(8.1)	(8.5)	(6.2)	(6.8)	(11.2)	(19.5)	(22.2)	(6.0)	(6.1)	(6.3)	(6.4)	(6.5)
Working Capital Red./ (Incr.)	0.0	0.0	(1.1)	0.0	0.0	0.0	(0.1)	(0.1)	0.0	(0.1)	(0.1)	(0.1)	(0.1)	(0.2)
FCF; old plants	10.5	11.4	0.7	0.8	(0.6)	(1.5)	0.0	0.4	1.8	2.5	2.6	2.8	2.9	3.2	43.4
FCF; new plants	(4.9)	(6.5)	(1.3)	(1.1)	5.9	5.5	1.4	(6.7)	(14.4)	4.7	4.7	4.8	4.8	4.7	54.0
FCF: reselling / other	0.0	0.4	0.4	3.1	3.0	2.5	1.8	1.4	1.0	0.8	0.6	0.5	0.4	0.3	2.2
FCF: cash one-offs	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
FCF (to EV)	5.7	5.2	(0.2)	2.8	8.4	6.4	3.3	(5.0)	(11.6)	8.0	8.0	8.0	8.1	8.2	99.5
Interest (CF)	(1.4)	(0.8)	(0.7)	(1.8)	(2.1)	(1.5)	(1.6)	(1.8)	(2.7)	(4.1)	(3.7)	(3.4)	(3.1)	(2.9)
FCF (to Equity)	4.3	4.4	(0.9)	1.0	6.3	4.9	1.6	(6.7)	(14.3)	3.9	4.2	4.6	4.9	5.3
Discounting parameters
Period for discounting, years	DCF					(1.4)	(0.4)	0.6	1.6	2.6	3.6	4.6	5.6	6.6	0.6
	DDM					(0.4)	0.6	1.6	2.6	3.6	4.6	5.6	6.6	7.6	1.6
Discounting factor	DCF						1.02	0.93	0.83	0.73	0.65	0.58	0.51	0.45	0.40
	DDM					1.03	0.92	0.80	0.70	0.61	0.53	0.46	0.40	0.35	0.31
DCF
DCF: Old plants							0.0	0.4	1.5	1.8	1.7	1.6	1.5	1.5	17.5
DCF: New plants							1.5	(6.3)	(11.8)	3.4	3.1	2.7	2.4	2.1	21.8
DCF: Reselling / other							1.9	1.3	0.9	0.6	0.4	0.3	0.2	0.1	0.9
DCF: total							3.3	(4.6)	(9.5)	5.8	5.2	4.6	4.1	3.7	40.1
TP (DCF), RUB bln or RUB/s			TP (w-average, rounded), RUB/s							Valuation parameters			DDM	DCF	Other
EV, RUB bln	53		TP		RUB/s	Weight				CoE			14.8%
Non-core assets	-		DDM		1.05	100%		DDM is a floor for PT		WACC				12.7%
Net (debt) / Cash (discounted), end 2018	(20)		DCF		0.94	0%				TG (Dividends)			4.0%
Equity, RUB bln	33		Result (rounded)		1.05	100%				TG (FCF): "old" assets				3.5%	0.0%
# of shares: current	35									TG (FCF): "new" assets				4.0%
# of shares: Ord: New	-
# of shares: Ord	35
# of shares: Ord: treasury	-
# of shares: Pref	-
# of shares: effective, total	35
TP (DCF), RUB	0.93

Source: company data, Gazprombank estimates

39

vk.com/id446425943

NOVEMBER 23, 2018	RUSSIA > EQUITY RESEARCH > UTILITIES

INITIATION OF COVERAGE

Mosenergo

RU

SSI

FCFY is declining with the start of CSA expirations, but FCFY- to-CoE premium sustainable until 2023

Although CSA expirations started earlier than the industry average (CSA for three new units to expire during 2018), Mosenergo's FCFY should show a premium to CoE until 2023.

Operations

Mosenergo is the key generator of electrical and heat energy for the needs of Moscow city and region, with ~13 GW of mainly co-generating electrical capacity.

Positives

 FCFY-to-CoE premium in 2018-23.

Note: Share prices as of closure 20-Nov-2018

TICKER	MSNG RX
Currency	RUB
Target price	2.40
Upside	40%
Recommendation	Overweight
MCap, bln	68
Share price	1.7
52-week high	3.1
52-week low	1.7

Source: Bloomberg, Gazprombank estimates

Strong balance sheet with no net debt.

Potential increase in dividend payout (from ~25% of 2017 IFRS net income) on the back of positive FCF and a strong balance sheet.

Presence of the Moscow Government (~26%) as a blocking shareholder, which reduces corporate governance risks.

	SHAREHOLDERS
		Gazprom		53.5%
		Energoholding
		Moscow (City
		Property		26.5%
		Department)
		Free-float		20.1%

Source: company data

 Potential beneficiary of the change in heat regulation ("althernative boiler shop").

Negatives

Modest historical dividend payout, e.g. ~25% of 2017 IFRS net income paid as dividends.

FCF and EBITDA to decline in 2019 due to the start of expiration of thermal CSAs: CHP- 27-3 (Jun. 2018), CHP-21 (Jun. 2018), CHP-27-4 (Dec. 2018).

More pressure on EBITDA, FCF with CSA expiration for new units CHP-26 (Nov. 2020), CHP-9 (June 2022), CHP-16 (Dec. 2023), CHP-12 (Dec. 2023), CHP-20 (Nov. 2024).

Valuation (2018-2026)

FCFY-to-CoE premium: 2018-23.

DY-to-CoD premium: 2021-23.

12M PRICE PERFORMANCE

140%
120%
100%
80%
60%		MOEX INDEX
		MSNG
40%	Jan-18	Mar-18	May-18	Jul-18
Nov-17					Sep-18

Source: Bloomberg

Chart 51. Mosenergo: FCF profile	Chart 52. Mosenergo: FCFY and DY profile
EBITDA (lhs), capex (lhs), FCFY (rhs)	FCFY (lhs), DY (lhs) and dividend payout vs IFRS net profit (rhs)

50	EBITDA, Capex								FCFY	30%	30%
	RUB bln								(line)
25										15%	15%
0										0%	0%
-25										-15%	-15%
2016	2017	2018E	2019E	2020E	2021E	2022E	2023E	2024E	2025E	2026E
	EBITDA ("NEW")				EBITDA ("OLD")			CAPEX		FCFY

FCFY and DY (columns)

2016

2017

2018E

2019E

2020E

2021E

2022E

FCF YIELD (LHS)

DIVIDEND PAYOUT (RHS)

			100%
		Dividend
		payout (line)
			50%
			0%
2023E	2024E	2025E	2026E
			-50%
	DIVIDEND YIELD (LHS)

Source: company data, Gazprombank estimates

Source: company data, Gazprombank estimates

40