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InterRAO

Results review

BUY (maintained)

TP: RUB7.85 (maintained)

Utilities

Russia

Strong 3Q18 defies negative sector trend

InterRAO today (14 November) reported a strong set of 3Q18 (9M18) figures, beating both consensus and our estimates, and defying the negative trend shown by other Russian gencos so far in 3Q18. Despite no change in InterRAO’s dividend policy, we believe the company is unlikely to be involved in valuedestructive M&A, while the use of its cash could be clarified in 2019 after the results of the modernisation auctions are revealed, and the company’s updated strategy materialises. We reiterate our BUY rating and RUB7.85/share TP.

Strong 3Q18 defies negative trends shown by other gencos

InteRAO’s 3Q18 revenue increased by 9.8% YoY, adjusted EBITDA increased by almost 41%, while net income rose 63% YoY. Both EBITDA and net income significantly beat consensus (Bloomberg) forecast for 3Q18. Given such a strong performance in the quarter, InterRAO’s 9M18 revenue rose 10.8% YoY to RUB688.2bn, adjusted EBITDA increased 28.6% YoY, while net profit increased 34.4% to RUB55.7bn. This result was due to a strong performance in the generation segment, where EBITDA grew by 11.6% (mostly due to new DPM units and higher DPM tariffs, as well as load optimisation) in electric power generation and by 25.8% in thermal power generation (due to growth in heat tariffs and output), and a very strong performance in the supply (EBITDA growth of 27.6% YoY due to higher tariffs and efficiency improvement) and trading segments (EBITDA increase of 103.6% YoY due to rouble devaluation and stronger electricity prices in the Nord Pool market).

Positive market reaction and consensus upgrade likely

Current Bloomberg consensus stands at RUB105bn for FY18 EBITDA and RUB64.5bn for FY net income. InterRAO expects FY18 EBITDA in the range of RUB110-115bn. We believe that given strong 9M18 figures for EBITDA and higher management expectations, a consensus upgrade is possible in terms of EBITDA expectations. InterRAO’s management expects the strong profitability in the supply and trading segments to continue, which we think could result in positive market sentiment. Management also confirmed its cautious attitude towards possible M&A opportunities, expressing no interest in the acquisition of Lukoil’s genco assets, and a possible participation in the Erkovetskaya GRES project at a significantly lower scale and only if there is a guaranteed investment return similar to its current DPM projects. Management also sees value in the possible expansion of its turbine manufacturing JV with GE.

We reiterate our BUY rating and RUB7.85 TP

InterRAO’s shares have outperformed the MOEX Index rising by 19% YtD vs 13% for the index. We maintain our BUY rating and RUB7.85 TP, despite management once again reiterating its expectation for a likely 25% dividend pay-out ratio for FY18, and a RUB146bn net cash position at end-3Q18. We believe that InterRAO is unlikely to be involved in value-destructive M&A, while the use of cash is likely to be clarified next year when the results of the modernisation auctions are revealed and the company’s updated strategy materialises. We see significant fundamental value in the stock and believe that the market attributes too little value to the company’s net cash position (which is close to 35% of InterRAO’s market cap) and quasi-treasury stock.

Sergey Beiden

+7 (495) 258-7770 x4205 SBeiden@rencap.com

Report date:

14 November 2018

Current price, RUB

 

4.03

Upside/downside, %

 

94.8

MktCap, RUBmn

 

420,732.0

Average daily volume, RUBmn

341.7

Free float, RUBmn

 

141,780.8

Bloomberg

 

IRAO RM

 

 

 

Summary valuation and financials, RUBmn (unless otherwise stated)

IFRS

2017

2018E

2019E

2020E

Revenue

917,049

932,528

950,583

992,428

EBITDA

95,471

108,984

109,585

114,603

Net income

54,448

71,733

77,783

82,114

Net debt

-125,634.0 -176,242.2 -242,267.2 -303,873.3

EPS, RUB

0.640

0.970

1.060

1.110

DPS, RUB

0.120

0.130

0.240

0.260

EV/Sales, x

0.2

0.2

0.2

0.1

EV/EBITDA, x

2.1

1.9

1.6

1.1

P/E, x

6.0

5.4

5.3

5.2

ND/EBITDA, x

-1.3

-1.6

-2.2

-2.7

Div yield, %

3.1

3.5

6.0

6.4

FCF yield, %

17.8

23.9

18.2

17.6

RoIC, %

9.4

12.3

12.1

11.9

Source: Company data, Renaissance Capital estimates

Figure 1: Price performance – 52 weeks, RUB

IRAO RM

5.0

 

 

 

 

 

 

 

 

 

 

 

 

4.5

 

 

 

 

 

 

 

 

 

 

 

 

4.0

 

 

 

 

 

 

 

 

 

 

 

 

3.5

 

 

 

 

 

 

 

 

 

 

 

 

3.0

 

Jan-18

 

Mar-18

Apr-18

 

Jun-18

Jul-18

 

 

Oct-18

 

Nov-17

Dec-17

Feb-18

May-18

Aug-18

Sep-18

Nov-18

Source: Bloomberg

© 2018 Renaissance Securities (Cyprus) Limited. All rights reserved. Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04). Hyperlinks to important information accessible at www.rencap.com: Disclosures and Privacy Policy, Terms & Conditions, Disclaimer.

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InterRAO 3Q18 and 9M18 financials

Renaissance Capital

14 November 2018

InterRAO

Figure 2: 9M18 financials, RUBbn

 

 

9M18

 

9M17

 

Change

 

RC

 

Consensus

 

diff %

 

diff %

 

 

 

 

 

estimates

 

estimates

 

RC

 

consensus

 

 

 

 

 

 

 

 

 

 

 

Revenue

688.2

621.1

10.8%

687.4

686.1

0%

0%

EBITDA

87.4

68.0

28.6%

84.3

83.7

4%

4%

Net Profit

55.7

41.5

34.4%

53.7

53.3

4%

5%

 

 

 

 

 

 

 

 

Source: Bloomberg, Company data, Renaissance Capital estimates

Figure 3: 3Q18 financials, RUBbn

 

 

 

 

 

 

 

 

 

 

 

 

3Q18

 

3Q17

 

Change

 

RC

 

Consensus

 

diff %

 

diff %

 

 

 

 

 

estimates

 

estimates

 

RC

 

consensus

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

227.5

 

207.2

 

9.8%

 

226.7

 

225.4

 

0%

 

1%

EBITDA

28.0

19.9

40.9%

25.0

24.3

12%

15%

Net Profit

 

17.4

 

10.7

 

62.9%

 

15.4

 

15.0

 

13%

 

16%

Source: Bloomberg, Company data, Renaissance Capital estimates

2