- •Investment summary
- •Forecast changes
- •Short-term outlook – write-offs distort the picture
- •Capex and dividends are debt financed
- •Disclosures
- •Production and Distribution of VTB Capital Research Reports outside the United States
- •Distribution of VTB Capital Research Reports to Investors within the United States
- •Relationship between VTB and Xtellus
- •Conflict of Interest Disclosures.
- •Issuer Specific Disclosures
- •Analysts Certification
- •Investment Ratings
- •12-month Target Prices
- •Conflicts Management Arrangements
vk.com/id446425943
Russia
Electric Utilities
22 November 2018
Rushydro, ord. (HYDR RX, RUB)
Buy (29 Aug 2017, 11:08 UTC) Previous: Sell (31 Jan 2013, 11:01 UTC) Target price, 12mo: 0.71
Last price: 0.53 (20 Nov 2018, close) Expected total return: 43%
Upside, 12mo: 34% DY, next 12mo: 9.0%
RusHydro, ADR (HYDR LI, USD)
Buy (13 Sep 2009, 21:09 UTC) Previous: n/a
Target price, 12mo: 1.07
Last price: 0.74 (20 Nov 2018, close) Expected total return: 54%
Upside, 12mo: 44% DY, next 12mo: 9.7%
Change of Target Price
RusHydro
Taking from Peter to Pay for Paul
As RusHydro falls out of MSCI indices and its share price drops (28% YTD), we step back to take a broader view of the company’s business model. In this report, we highlight the existing inefficiencies of RusHydro’s capital allocation and consider management’s options. Ultimately, we conclude that RusHydro’s cost of capital deserves a premium, as its allocation is not economically rational. Our new 12-month Target Price of RUB 0.71 implies an ETR of 43%; Buy reiterated.
Far East operations: dotting the I’s. Our analysis of RusHydro’s operations in the Russian Far East (RAO Vostoka) brings forth some numbers that raise concerns. RAO Vostoka’s capex regularly exceeds EBITDA; for FY18F we
Share price performance, 12-mo
|
0.9 |
|
|
|
|
0% |
|
|
0.8 |
|
|
|
|
-10% |
|
|
0.7 |
|
|
|
|
||
|
|
|
|
|
|
||
|
0.6 |
|
|
|
|
-20% |
|
|
0.5 |
|
|
|
|
-30% |
|
|
0.4 |
|
|
|
|
||
|
|
|
|
|
|
||
Equities |
0.3 |
|
|
|
|
-40% |
|
0.2 |
|
|
|
|
-50% |
||
0.1 |
|
|
|
|
|||
|
|
|
|
|
|||
0 |
|
|
|
|
-60% |
||
Nov |
Jan |
Mar |
May |
Jul |
Sep |
||
|
HYDR RX, RUB, lhs
Relative to MOEX Index, %, rhs
|
1M |
3M |
12M |
3Y |
Price |
-6% |
-15% |
-44% |
-13% |
Price relative |
-6% |
-17% |
-49% |
-32% |
ADTV (USD mn) |
6.02 |
5.08 |
5.78 |
7.89 |
Key financial highlights
Fiscal year end |
12/17 |
12/18F |
12/19F |
12/20F |
P/E, x |
16.3x |
5.5x |
8.4x |
4.5x |
EV/EBITDA, x |
4.8x |
2.6x |
3.0x |
3.0x |
P/B, x |
0.5x |
0.3x |
0.3x |
0.3x |
FCF yield, % |
3.4% |
6.8% |
-3.3% |
-2.3% |
DY (ords), % |
3.1% |
9.1% |
7.7% |
11.2% |
Net sales, RUB mn |
348,119 |
372,154 |
373,234 |
386,751 |
EBITDA, RUB mn |
97,821 |
114,609 |
112,499 |
119,573 |
Net income, RUB mn |
22,451 |
40,767 |
26,679 |
50,179 |
Net sales, chg |
-7% |
7% |
0% |
4% |
EBITDA, chg |
-7% |
17% |
-2% |
6% |
Net income, chg |
-44% |
82% |
-35% |
88% |
forecast EBITDA to reach only 78% of its state/market subsidies and annual capex of as much as 13% of its total assets. This implies the undertaking of massive investments that do not lead to profitability improvement. We are conscious of the enterprise’s strategic importance for Russia’s economic development, the reliability of its electricity supply and its ‘wholeness’. However, we also note that of the RUB 246bn RAO Vostoka paid in 2018F in opex, capex, taxes and interest payments – all cash outflows required for business-as-usual operations of this strategically important enterprise – only RUB 157.9bn was paid by local consumers and RUB 35bn by the power market. The rest, some RUB 53.0bn, came from the pockets of RusHydro shareholders. This shareholder subsidy accounts for 57% of the EBITDA generated by hydro assets, and 7% of ROIC, and was spent on assets that are unlikely to provide any economic return. The predictability of this gap is extremely low. Thus, the process of forecasting dividend growth or capex reduction becomes an opaque game of predicting government willingness to share the burden of maintaining Far Eastern operations through more economically rational tools.
How low is low? The two fundamental changes to our view are i) the incorporation of a WACC surcharge to accommodate the abovementioned risks; and ii) the capitulation of our expectations of capex moderation. As a result, we have reduced our 12-month Target Price 21% to RUB 0.71/share (USD 1.07/GDR). However, upside requires fundamental shifts in operations – most importantly a change to the paradigm within which the Far Eastern operations relate to the hydro business. We acknowledge that, hypothetically, a turnaround for RusHydro could be quick: limiting Far Eastern capex to DPM-like mechanisms and a more proactive distribution of dividends (which the state could use to subsidise the cost of electricity in the Russian Far East) would turn RusHydro into a fundamentally more attractive company. Despite seeing the chances of such a change as low and/or viable only in the medium term, we continue to rate RusHydro as a Buy, as we believe that the 28% YTD drop in the share price is
EPS(ords), RUB |
0.053 |
0.097 |
0.063 |
0.12 |
|
overdone, and that it has mainly been driven by the MSCI factor. At current |
|
DPS (ord.), RUB |
0.03 |
0.05 |
0.04 |
0.06 |
|
levels, we have RusHydro trading at a potential 9% dividend yield and 2018F |
|
BPS(ords), RUB |
1.65 |
1.73 |
1.75 |
1.84 |
|
EV/EBITDA of 2.6x vs. 3.0x average for Russian Gencos. Both factors suggest |
|
EBITDA margin, % |
28.1% |
30.8% |
30.1% |
30.9% |
|
||
|
the downside is limited in the name, while our 12-month Target Price implies an |
||||||
ROE, % |
3% |
6% |
4% |
6% |
|
||
|
ETR of 43%. |
||||||
Net Debt, RUB mn |
99,369 |
76,764 |
110,351 |
137,305 |
|
||
ND/EBITDA, x |
1.0x |
0.7x |
1.0x |
1.1x |
|
|
|
|
Vladimir Sklyar, Equities Analyst |
||||||
Net int. cover, x |
10.1x |
6.4x |
6.4x |
6.6x |
|
||
|
+7 495 589 21 62 // vladimir.sklyar@vtbcapital.com |
||||||
Multiples and yields are calculated based on period-average prices |
|||||||
|
Anastasia Tikhonova, Equities Analyst |
||||||
where available. |
|
|
|
|
|
||
Source: Bloomberg, Company data, VTB Capital Research |
|
|
+7 495 660 42 18 // anastasia.tikhonova@vtbcapital.co |
Prices cited in the body of this report are as of the last close before, or the close on, 20 Nov 2018 (except where indicated otherwise). VTB Capital analysts update their recommendations periodically as required. This research report was prepared by the analyst(s) named above who is(are) associated with Entity and is distributed by JSC VTB Capital and VTB Capital PLC and their non-U.S. affiliates outside the United States. This VTB Capital research report is distributed to investors located within United States by Xtellus Capital Partners, Inc. (“Xtellus”) as a “third-party research report” as defined in Rule 2241(a)(14) and Rule 2242(a)(17) of the U.S. Financial Industry Regulatory Authority. Please refer to the Disclosures section of this report for other important disclosures, including the analyst certification and information required by regulation.
vk.com/id446425943
Russia
Electric Utilities
RusHydro |
|
Table of contents |
|
Investment summary.................................................................................................. |
5 |
Forecast changes .................................................................................................. |
14 |
Short-term outlook – write-offs distort the picture .................................................. |
15 |
Capex and dividends are debt financed................................................................. |
16 |
Disclosures ............................................................................................................... |
18 |
22 November 2018 |
2 |
vk.com/id446425943
Russia
Electric Utilities
VTB Capital Facts & Forecasts
Russia
Electric Utilities
RusHydro
Prices as of: 20 November 2018
Ticker |
CCY |
Current |
12mo TP |
Rating |
HYDR RX |
RUB |
0.53 |
0.71 |
Buy |
Share price performance, 12-mo
1 |
0% |
0.8 |
-10% |
|
|
0.6 |
-20% |
|
|
|
-30% |
0.4 |
-40% |
|
|
0.2 |
-50% |
|
|
0 |
-60% |
Nov Jan Mar May Jul Sep Nov
HYDR RX, RUB, lhs
Relative to MOEX Index, %, rhs
Company description
RusHydro is a state-owned utility that consolidates 27GW of hydro power plants across Russia and 9GW of fossil-fuel power plants, as well as electricity grids in the Russian Far East. It is one of the world's largest traded hydroelectric companies, and maintains listings on both the MICEX and the LSE. The state controls 60.5%, while another 13.5% stake is controlled by VTB.
Company website
http://www.eng.rushydro.ru/
Shareholder structure
Free float |
Federal |
|
Property |
||
26% |
||
Agency |
||
|
||
|
61% |
VTB 13%
Source: Company data, VTB Capital Research
Research team
Vladimir Sklyar / +7 495 589 21 62
Anastasia Tikhonova / +7 495 660 42 18
RusHydro
Last model update on: 22 November 2018
|
IFRS |
2016 |
2017 |
2018F |
2019F |
2020F |
|
2021F |
||
|
Company data |
|
|
|
|
|
|
|
|
|
|
Weighted avg # shares, mn |
|
367,430 |
422,436 |
422,436 |
422,436 |
422,436 |
|
422,436 |
|
|
Avg market cap, RUB mn |
265,880 |
366,165 |
224,103 |
224,103 |
224,103 |
224,103 |
|
||
|
EV, RUB mn |
398,329 |
465,534 |
300,866 |
334,454 |
361,408 |
371,075 |
|
||
|
Ratios & analysis |
|
|
|
|
|
|
|
|
|
|
P/E, x |
|
6.7x |
16.3x |
5.5x |
8.4x |
4.5x |
|
6.4x |
|
|
EV/EBITDA, x |
3.8x |
4.8x |
2.6x |
3.0x |
3.0x |
|
2.9x |
||
|
P/B, x |
|
0.4x |
0.5x |
0.3x |
0.3x |
0.3x |
|
0.3x |
|
|
FCF yield, % |
2.7% |
3.4% |
6.8% |
-3.3% |
-2.3% |
11.9% |
|
||
|
Dividend yield (ords), % |
7.5% |
3.1% |
9.1% |
7.7% |
11.2% |
9.3% |
|
||
|
Dividend yield (prefs), % |
|
|
|
|
|
|
|
|
|
|
EPS(ords), RUB |
0.11 |
0.053 |
0.097 |
0.063 |
0.12 |
0.082 |
|
||
|
CFPS, RUB |
0.19 |
0.18 |
0.30 |
0.26 |
0.25 |
0.28 |
|
||
|
Free CFPS, RUB |
0.020 |
0.030 |
0.036 |
(0.018) |
(0.012) |
0.063 |
|
||
|
DPS (ords), RUB |
0.054 |
0.027 |
0.048 |
0.041 |
0.059 |
0.049 |
|
||
|
Payout ratio (ords), % |
50.0% |
50.0% |
50.0% |
64.3% |
50.0% |
60.0% |
|
||
|
BPS(ords), RUB |
1.77 |
1.65 |
1.73 |
1.75 |
1.84 |
1.86 |
|
||
|
Revenues growth, % |
|
8% |
-7% |
7% |
0% |
4% |
|
4% |
|
|
EBITDA, chg |
|
38% |
-7% |
17% |
-2% |
6% |
|
7% |
|
|
EPS growth, % |
|
45% |
-51% |
82% |
-35% |
88% |
|
-31% |
|
|
EBIT margin, % |
22% |
21% |
24% |
23% |
23% |
24% |
|
||
|
EBITDA margin, % |
28.2% |
28.1% |
30.8% |
30.1% |
30.9% |
31.9% |
|
||
|
Net margin, % |
10.6% |
6.4% |
11.0% |
7.1% |
13.0% |
8.7% |
|
||
|
ROE, % |
6.1% |
3.2% |
5.6% |
3.6% |
6.5% |
4.4% |
|
||
|
ROIC, % |
3.5% |
3.6% |
5.7% |
3.8% |
6.0% |
4.5% |
|
||
|
Capex/Revenues, % |
16% |
21% |
22% |
30% |
28% |
23% |
|
||
|
Capex/Depreciation, x |
2.5x |
2.9x |
3.2x |
4.2x |
3.7x |
|
2.8x |
||
|
Net debt/Equity, % |
20% |
14% |
11% |
15% |
18% |
19% |
|
||
|
Net debt/EBITDA, x |
1.3x |
1.0x |
0.7x |
1.0x |
1.1x |
|
1.1x |
||
|
Net interest cover, x |
9.0x |
10.1x |
6.4x |
6.4x |
6.6x |
|
6.5x |
||
|
Income statement summary, RUB mn |
|
|
|
|
|
|
|
|
|
|
Revenues |
374,072 |
348,119 |
372,154 |
373,234 |
386,751 |
401,385 |
|
||
|
Cost of sales |
(298,708) |
(284,739) |
(297,177) |
(298,876) |
(306,161) |
(313,142) |
|
||
|
SG&A and other opexp. |
(3,695) |
9,435 |
16,171 |
(2,763) |
24,983 |
2,089 |
|
||
|
EBITDA |
105,591 |
97,821 |
114,609 |
112,499 |
119,573 |
128,239 |
|
||
|
Depreciation & amortization |
|
(24,130) |
(25,023) |
(25,757) |
(27,300) |
(29,484) |
|
(32,666) |
|
|
Operating profit |
47,539 |
47,792 |
65,392 |
44,295 |
76,090 |
57,667 |
|
||
|
Non-operating gains /(exp.) |
|
- |
(13,946) |
(6,860) |
(3,180) |
(3,460) |
|
(2,772) |
|
|
EBIT |
81,461 |
72,798 |
88,853 |
85,199 |
90,090 |
95,573 |
|
||
|
Net interest income/(exp.) |
902 |
1,256 |
(7,574) |
(7,765) |
(9,906) |
(11,371) |
|
||
|
Profit before tax |
55,123 |
35,519 |
50,959 |
33,349 |
62,723 |
43,524 |
|
||
|
Income tax |
(15,372) |
(13,068) |
(10,192) |
(6,670) |
(12,545) |
(8,705) |
|
||
|
Net income |
39,751 |
22,451 |
40,767 |
26,679 |
50,179 |
34,819 |
|
||
|
Cash flow statement summary, RUB mn |
|
|
|
|
|
|
|
|
|
|
Cash flow from operations |
71,373 |
78,125 |
125,536 |
108,284 |
107,135 |
120,143 |
|
||
|
Working capital changes |
(15,394) |
(9,491) |
14,750 |
(3,931) |
(6,512) |
(6,259) |
|
||
|
Capex |
(60,691) |
(71,480) |
(81,271) |
(113,543) |
(109,561) |
(90,579) |
|
||
|
Other investing activities |
21,678 |
11,439 |
6,266 |
5,563 |
3,652 |
3,376 |
|
||
|
Free cash flow |
7,269 |
12,610 |
15,246 |
(7,448) |
(5,099) |
26,736 |
|
||
|
Share issue (reacquisition) |
33 |
55,000 |
4,000 |
3,000 |
6,000 |
- |
|
||
|
Dividends paid |
(14,462) |
(19,800) |
(11,226) |
(20,384) |
(17,162) |
(25,089) |
|
||
|
Net change in borrowings |
7,863 |
(31,227) |
(17,192) |
16,500 |
1,300 |
28,400 |
|
||
|
Other financing cash flow |
(20,271) |
(19,037) |
(20,699) |
(16,509) |
(17,019) |
(17,518) |
|
||
|
Movement in cash |
|
19,329 |
2,802 |
5,413 |
(17,088) |
(25,654) |
|
18,733 |
|
|
Balance sheet summary, RUB mn |
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
67,354 |
70,156 |
75,569 |
58,482 |
32,828 |
51,560 |
|
||
|
PP&E |
765,047 |
799,855 |
831,909 |
877,248 |
943,325 |
963,332 |
|
||
|
Other assets |
151,045 |
158,240 |
133,204 |
127,152 |
124,732 |
122,409 |
|
||
|
Total assets |
983,446 |
1,028,251 |
1,040,682 |
1,062,882 |
1,100,885 |
1,137,301 |
|
||
|
Interest bearing debt |
|
199,803 |
169,525 |
152,333 |
168,833 |
170,133 |
|
198,533 |
|
|
Other liabilities |
|
132,711 |
163,162 |
159,244 |
155,648 |
153,334 |
|
151,620 |
|
|
Total liabilities |
|
332,514 |
332,687 |
311,577 |
324,481 |
323,467 |
|
350,153 |
|
|
Total shareholder's equity |
646,669 |
692,845 |
726,386 |
735,682 |
774,699 |
784,429 |
|
||
|
Minority interest |
4,263 |
2,719 |
2,719 |
2,719 |
2,719 |
2,719 |
|
||
|
Net working capital |
12,329 |
21,099 |
19,253 |
13,618 |
10,052 |
6,670 |
|
||
|
Net Debt |
132,449 |
99,369 |
76,764 |
110,351 |
137,305 |
146,973 |
|
||
|
Capital |
846,472 |
862,370 |
878,719 |
904,515 |
944,832 |
982,962 |
|
||
|
|
|
|
|
|
|
|
|
|
|
22 November 2018 |
3 |
vk.com/id446425943 |
RusHydro |
Russia |
|
Electric Utilities |
|
Figure 1: General company information
Ticker |
HYDR RX |
12-month Target Price, RUB/share |
0.71 |
Recommendation |
BUY |
Installed capacity in 2018F, MW |
35,919 |
Current price, RUB/share |
0.53 |
Market cap, RUB mn |
224,103 |
EV, RUB mn |
300,866 |
EV/Installed capacity, USD/kW |
128 |
Multiples 2018F |
|
EV/EBITDA |
2.6 |
PE |
5.5 |
EBITDA margin, % |
31% |
Net debt/EBITDA |
0.7 |
Source: Company data, Bloomberg, VTB Capital Research
Figure 2: RusHydro FCFF profile
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
80,000 |
|
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|
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60,000 |
|
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RUBmn |
40,000 |
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20,000 |
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- |
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(20,000) |
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(40,000) |
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2012 |
2013 |
2014 |
2015 |
2016 |
2017F |
2018F |
2019F |
2020F |
2021F |
2022F |
2023F |
2024F |
2025F |
2026F |
2027F |
2028F |
Source: Company data, VTB Capital Research
Figure 3: RusHydro dividend yield profile
30%
27%
25% |
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23% |
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20% |
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17% |
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15% |
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14%14% |
14% |
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11% |
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12% |
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||||
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9% |
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||
10% |
|
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7% |
|
9% |
8% |
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7% |
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||
5% |
3% |
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3% |
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0% |
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2014 |
2015 |
2016 |
2017 |
2018F |
2019F |
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2020F |
2021F |
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2022F |
2023F |
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2024F |
|
2025F |
|
2026F |
|
2027F |
2028F |
||
|
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|
Source: Company data, VTB Capital Research
Figure 5: RusHydro adjusted EBITDA profile
RUBmn
250,000
200,000
150,000
100,000
28% 28% 31% 30% 31% 32% 32% 33% 35% 36% 37% 38% 40%
21% 22%
45%
40%
35%
30%
25%
20%
15%
%
50,000 |
10% |
|
|
|
5% |
- 0%
2014 |
2015 |
2016 |
2017 |
2018F |
2019F |
2020F |
2021F |
2022F |
2023F |
2024F |
2025F |
2026F |
2027F |
2028F |
|
|
Adj. EBITDA, lhs |
|
Adj. EBITDA margin, rhs |
||||||||||||
|
|
||||||||||||||
|
|
Source: Company data, VTB Capital Research
Figure 4: RusHydro capex outlook
|
|
140 |
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|
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120 |
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114 |
110 |
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- |
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100 |
100 |
100 |
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100 |
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100 |
100 |
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100 |
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12 |
29 |
91 |
87 |
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81 |
81 |
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13 |
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RUBbn |
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29 |
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80 |
- |
- |
29 |
3 |
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60 |
3 |
19 |
18 |
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42 |
42 |
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42 |
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42 |
42 |
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5 |
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3 |
29 |
29 |
29 |
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22 |
5 |
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3 |
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3 |
3 |
3 |
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3 |
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3 |
3 |
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17 |
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3 |
31 |
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40 |
32 |
36 |
32 |
33 |
33 |
33 |
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33 |
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33 |
33 |
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18 |
27 |
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- |
- |
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- |
- |
- |
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- |
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- |
- |
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20 |
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10 |
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|||||||||
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20 |
20 |
19 |
18 |
18 |
5 |
|
5 |
5 |
5 |
|
5 |
|
5 |
5 |
|||
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- |
17 |
17 |
17 |
17 |
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17 |
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17 |
17 |
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2017 |
2018F |
2019F |
2020F |
2021F |
2022F |
|
2023F |
2024F |
2025F |
2026F |
2027F |
2028F |
|||||
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||||||||||||||||
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Additional capex |
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Far East modernisation |
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Other |
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RAO Vostoka |
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Key projects in the Far East |
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New construction |
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Hydro rehab and modernisation |
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Total |
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Source: Company data, VTB Capital Research
Figure 6: RusHydro EV/installed capacity
600
500
400
USD/kW 300
200
100
- 08-Jan 08-Aug 09-Mar 09-Oct 10-May 10-Dec 11-Jul 12-Feb 12-Sep 13-Apr 13-Nov 14-Jun 15-Jan 15-Aug 16-Mar 16-Oct 17-May 17-Dec
Source: Bloomberg, Company data, VTB Capital Research
Figure 7: Russian gencos multiples
|
EV/EBITDA, |
|
P/E, |
|
EV/kW, |
|
Net Debt/ |
|
|
EBITDA |
|
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Net |
|
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Dividend |
|
FCFF |
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||||
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x |
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x |
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USD/kW |
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EBITDA, x |
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margin |
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margin |
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yield |
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yield |
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|
2018F 2019F 2020F |
2018F 2019F |
2020F |
2018F |
2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F |
2020F 2018F 2019F 2020F |
|||||||||||||||||
RusHydro |
2.6 |
3.0 |
3.0 |
5.5 |
8.4 |
4.5 |
128 |
0.7 |
1.0 |
1.1 |
31% |
30% |
31% |
11% |
7% |
13% |
9.1% |
|
7.7% |
11.2% |
7% |
-3% |
-2% |
Russian average |
3.0 |
3.0 |
2.7 |
5.6 |
6.3 |
5.8 |
111 |
0.4 |
0.5 |
0.5 |
23% |
23% |
24% |
11% |
10% |
11% |
7.5% |
|
6.4% |
7.6% |
18% |
7% |
7% |
DM average |
8.6 |
7.9 |
6.6 |
16.7 |
14.3 |
12.1 |
2,153 |
3.1 |
2.8 |
2.2 |
18% |
18% |
20% |
6% |
7% |
8% |
5.3% |
|
5.3% |
5.3% |
-5% |
-5% |
-5% |
Source: Bloomberg as of 20 November 2018 for DM average, VTB Capital Research
22 November 2018 |
4 |
vk.com/id446425943 |
RusHydro |
Russia |
|
Electric Utilities |
|
Investment summary
RusHydro’s problem is its poor return on invested capital. The return peaked in 2006, and has not replicated that high watermark since. Even then, it was only 8.2%, low by the standards of Russian equity. Moreover, in 2019F, we forecast it to hit the lowest level in seven years (3.9%) and stay muted until at least 2022, when we expect the first Russian Far Eastern DPM projects to bring in a 14% post-tax guaranteed return (although even this return is not seen as guaranteed by the company’s CEO).
Figure 8: RusHydro ROIC development, %
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
8.2% |
3.2% |
|
7.6% |
4.3% |
6.4% |
2.4% |
3.5% |
3.4% |
4.5% |
4.4% |
5.9% |
3.9% |
6.4% |
4.7% |
7.0% |
7.1% |
4.7% |
6.8% |
7.5% |
9.3% |
9.9% |
|
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2.6% |
|
|
|
-0.8% |
|
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- |
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|
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018F |
2019F |
2020F |
2021F |
2022F |
2023F |
2024F |
2025F |
2026F |
2027F |
2028F |
Source: Company data, VTB Capital Research
A low ROA has been commonplace for Russian utilities, mainly due to the breakeven tariff for regulated electricity prices and all capacity prices. As a result, ROIC on legacy assets (pre-privatisation of 2007) continues to generate sub-par returns, while newly added assets – built under DPM or planned to be built under modernisation DPM (DPM-2) – add an economically rational ROIC, pushing the average upward.
Figure 9: 2017 ROA
15.0%
10.0%
5.0%
0.0%
-5.0% -4.2%
|
|
|
12.0% 14.0% |
|
4.8% |
6.1% |
6.8% |
|
|
|
|
2.3% |
2.5% |
|
|
0.4% |
|
|
|
-0.2%
-10.0% |
|
|
|
RusHydro |
|
Unipro |
Enel Russia |
DPM renewables |
|
OGK2 |
TGK1 |
Mosenergo |
Average for Russian gencos |
InterRAO |
Thermal DPM |
Source: Company data, VTB Capital Research
22 November 2018 |
5 |
vk.com/id446425943 |
RusHydro |
Russia |
|
Electric Utilities |
|
The specific issue with RusHydro is that it adds assets – i.e. employs capital – that generate ROIC below even the current depressed levels. There are many examples of investment into the Russian Far East that were en masse written off, driven by their low value under the DCF valuation of the assets built.
Figure 10: RusHydro write-offs track record, RUB mn
RUBmn
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
Key contributors:
1.Impairment of PPE - RUB19.3bn
2.Impairment of investment in Krasnoyarskaya HPP and PP&E
of Krasnoyarskaya HPP
RUB13.3bn
39%
10% 12%
|
|
100% |
|
Key contributors: |
|
90% |
|
|
|
||
Impairment of PPE RUB26.5bn |
80% |
||
78% |
|
||
|
|
||
|
|
70% |
|
|
|
60% |
|
46% |
|
50% |
|
|
40% |
||
|
|
||
32% |
|
30% |
|
26% |
26% |
||
|
|||
19% |
20% |
20% |
|
|
|
||
|
|
10% |
1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018F |
||||
|
|
|
Write-offs, lhs |
Share of Adj EBITDA, rhs |
|
|
|
|
|||||||
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
%
Source: Company data, VTB Capital Research
Further instances would be the elevated maintenance expenditures on hydro capacities that we believe are clearly about deep refurbishments, rather than pure maintenance. At a time when fossil fuel generators are modernising such capacity under a guaranteed return-on-investment scheme, RusHydro undertakes such investments without stimuli.
Figure 11: Russian gencos maintenance capex per kW based on 2018F, RUB/kW
Maintenance capex, RUB/kW
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
-
|
|
|
|
|
|
Mosenergo and TGK1 capex |
1,877 |
|||||||
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
includes capex on heat |
|
|
||||
|
|
|
|
|
|
|
|
distribution network |
|
|
||||
|
|
|
|
|
981 |
992 |
|
|
|
|||||
|
526 |
537 |
636 |
|
|
|
|
|
|
|
|
|||
481 |
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unipro |
|
InterRAO |
|
OGK2 |
|
Enel Russia Mosenergo |
|
RusHydro |
|
TGK1 |
Source: Company data, VTB Capital Research
Our previous investment case (RusHydro – Thorny road to value-unlocking, of 22 February) was based on two key pillars. First, a moderation of these economically irrational investments to a level that would ensure technically reliable continuous operations at minimum cost. Second, a rise (or completion) of investments with clear, transparent mechanisms that make economic sense – a DPM mechanism for Zagorskaya GAES-2, and a 14% return on investments in the Russian Far East.
22 November 2018 |
6 |
vk.com/id446425943
Russia
Electric Utilities
1Q15 conference call, George Rizhinashvili, CFO
3Q15 conference call, George Rizhinashvili, CFO
1Q16 conference call, George Rizhinashvili, CFO
2Q16 Timur Akhmedzhanov, Head of
Investor Relations
2Q16 conference call, George Rizhinashvili, CFO
3Q16 conference call, George Rizhinashvili, CFO
FY16 conference call, Dmitry Belyaev, Director for Strategy, M&A and Investor Relations
FY16 conference call, George Rizhinashvili, CFO
RusHydro
In this report, we acknowledge that our outlook was too bullish and moderate. What triggered our review? The answer is that we now believe the company’s capex is unlikely ever to moderate.
1.Management’s guidance tends to go up with time.
“Second, it's something that we address as value vs. capex, as we previously discussed, this is impossible to work on with the high levels of cash flow, that can be distributed again to the shareholders without capex cutting programme
[VTBC emphasis], that we also want to present in October and November. At least a new approach for our investment programme as the company, and something that is going abroad for our descriptions of the investment programme that we presented before. Of course, this physical one of capex and precise projects where we want to look on the frozen model for those equipment. So again, just give us a little bit more time because we worked with our advisers and our potential partners in share capital and we need a little bit more time just to be more precise in this case, but these are the three directions that we tried to evaluate and again we'll be ready to present the precise indicators before the end of September.”
“We have reviewed earlier our rehabilitation and modernisation programme, and have cut the allocated capex by RUB 10bn without compromising the technical characteristics and safety of the facilities.”
“We think the results we'll present today are very strong and reflect the renewed focus of the Board of Directors and management team on operating efficiency, overall cost reduction and capex optimisation. As we have disclosed already, RusHydro has initiated optimisation of the three-year capex plan and reduced the 2016 and 19 capex by 8% from earlier planned figures. The key change is the reduction of rehabilitation and modernisation capex to no more than RUB 29bn or RUB 30bn per year.”
“So we believe that the results for the six-months of 2016 we're going to present today are quite strong and reflect significant increase in output by hydropower plants on the back of robust inflows, liberalise -- water inflows, liberalisation of hydro capacity market in Siberia and the interim results of the cost optimisation plan initiated by the management to ensure operating efficiency, overall cost reduction and capex optimisation. As we have announced already, RusHydro has initiated the optimisation of the three year capex plan and reduced 2016, 2019 capex by around 9% from earlier planned figures. In particular, under the revised plan, the rehabilitation and modernisation capex will be -- will not exceed RUB 28bn, RUB 29bn per year.”
“So the total capex optimisation is equal to RUB 58bn as for the period, before end of 2020. The materials and documents were sent to Ministry of Energy, and they've been approved by our Board. Also, we expect the formal approval for our investment -- fiveyear investment programme before the end of this year.”
“First of all, as you know, in our capex projections, we include 18% value-added tax, which will be subtracted from the cash flow statement, and also depending on the capex execution in the fourth quarter, probably we could expect also a lower figure than we have projected for 2016. But in early 2017, we will also make an adjustment for the projected capex for 2017.
Do you have any particular projects that you have to complete this year that will boost your capex spending or is it like more or less flat figures?
This year we are planning to commission Zelenchukskaya hydropower plant and Zaragizhskaya, small hydropower plant. Regarding Yakutskaya CHP, it looks like it will be postponed to next year.”
“We also have optimised our capex plan for the 2016 to 2019 by RUB 60bn without compromising safety and reliability.”
“Thanks to good growth output, so we have shown a steady growth of operational cash flow in 2017 regardless of capex that are as yet high, we expect to become FCF positive in the coming two years. “
22 November 2018 |
7 |
vk.com/id446425943 |
RusHydro |
Russia |
|
Electric Utilities |
|
FY17 conference call, George Rizhinashvili, CFO
2Q18 conference call, Timur Akhmedzhanov, Head of Investor Relations
“The amount of power generation capacity to be replaced in the Russian Far East is around 1.3 gigawatts, and the required investment level is around RUB 140-150bn spent in 5 to 10 years. Again, this is not an amount to be included into our capex plan now, this is the amount of investment that can possibly be used to finance projects in the Russian Far East, including the surcharge mechanism to ensure a comprehensive upgrade programme for the rest of Far Eastern utilities.”
“Now, regarding the rehabilitation and modernisation of our hydro capacity, the full capex for hydro rehabilitation and modernisation is estimated at around RUB 24bn, RUB 25bn. But this amount is flexible and as we have written in our presentation, the current investment plan could be further of heat during this year or next year by the Board of Directors and by the management.”
Figure 12: RusHydro CMD 8 December 2016
Capital markets day
Optimization of RusHydro Group investment plan for 2016-2021
~RUB 60 bn |
Adjustme nt of technical projects with new technical condition assumptions, adju stment of works’ schedule: |
|
|
In respect of modernization of hydro in Dagestan, North Ossetia, Kuban’; |
|
Total optimizationof hydropower rehabilitation and |
Selection of che aper equi pment (Chi na, south Korea). |
|
modernization capex in nominal prices in 2016-2019, |
Optimization and improvement of terms of existing agreements to supply new equipment: |
|
carried out without compromising reliability and safety of |
||
In respect of agreement with Voith Hydro to supply hydro turbines for Saratovskaya HPP |
||
works and operations |
||
|
In respect of agreement with Power Machines to supply hydro units for Votkinskaya and Rybinskaya HPPs . |
|
|
Extension of works’ schedule: |
|
> RUB 5.5 bn |
||
Opti mizati on of capex outlays due to delay of a numbe r of works; |
||
Optimization of RAO ES East subgroup capex in 2016,due |
Adjustment of terms and schedule to supply hydromechanical equipment for Vol ga -Kama hydropower plants |
|
to shift in funding of additionalinfrastructure for 2017and |
Adjustme nt of scope of works: carrying out per-unit reconstruction instead of total replacement of equipment |
|
reduction of funding of rehabilitation and modern ization |
Cutting non-productive costs: adjusting the scope and cost of works that do not affect electricity output . |
|
projects |
||
|
||
|
|
Optimization of RusHydro Group investment plan for 2016-2021 (1)
128.4 |
-19% |
+6% |
|
|
|
Other |
|
|
|
|
|
RAO ES East Subgroup |
|
||||
98.0 |
103.8 |
109.1 115.6 |
|
|
|
4 fossil fuel projects in the Far East |
||
1,0 |
|
|
|
New hydro construction |
|
|||
3,2 |
3,6 |
34,5 |
-13% |
|
|
Hydro rehab & modernization |
|
|
|
|
|
|
|
|
|||
|
28,4 |
73.2 |
|
-15% |
69.1 |
-32% |
|
|
21,1 |
63.8 |
59.4 |
|
|||||
|
|
|
|
|
|
|||
23,2 |
24,4 |
25,1 |
0,9 |
50.5 |
|
47.2 |
47.5 |
|
|
|
|
||||||
|
|
20,8 |
|
|
||||
|
|
|
|
1,0 |
|
1,2 |
1,3 |
|
|
|
26,2 |
|
|
|
|||
21,0 |
|
|
|
16,7 |
|
|||
21,3 |
13,6 |
|
|
17,2 |
17,3 |
|||
|
|
|
3,6 |
|
||||
|
|
|
|
|
|
0,2 |
0,2 |
|
|
|
|
|
|
|
|
||
29,5 |
26,1 |
28,8 |
28,5 |
|
29,2 |
|
28,6 |
28,7 |
2015 |
2016 |
2016 |
2017 |
2017 |
2018 |
2018 |
2019 |
2019 |
2020 |
2020 |
2021 |
|
|
корр. |
|
корр. |
|
корр. |
|
корр. |
|
корр. |
|
|
|
new |
|
new |
|
new |
|
new |
|
new |
|
(1) Includes VAT . Investment plan does not include funding of BEMO project and rehabilitation and reconstruction of 840 MW Zagorskaya PSP-2 – the project is now under technical scrutiny and cost estimate.
Source: Company data, VTB Capital Research
Figure 13: RusHydro CMD 21 April 2017
Capital markets day 2017
Investment plan of RusHydro Group in 2017-2022, RUB bn (incl. VAT)
-17%
-21 bn
|
|
|
+5% |
|
|
|
|
|
|
|
|
122.4 |
|
+5.4 bn |
|
|
Rehabilitaion and modernization of HPPs |
|
|
|
|||
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
New construction |
|
|
|
|
||
3,6 |
|
|
115.2 |
|
|
|
|
|
|
||
|
109.8 |
|
|
Priority |
projects in the Far East |
|
|
|
|
||
|
|
2,5 |
|
|
|
|
|
|
|||
|
|
|
|
RAO ES East subgroup (rehabilita tion and modernization, new constru ction |
|||||||
|
101.3 |
3,1 |
|
|
|
||||||
|
|
|
|
Other (1) |
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
||
40,5 |
3,7 |
|
|
|
|
|
|
|
|
|
|
|
|
33,6 |
40,4 |
|
+16% |
|
|
|
|
|
|
|
|
|
+9.5 bn |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||
|
31,2 |
|
|
|
|
+1% |
|
|
|
|
|
|
|
|
|
|
70.7 |
|
|
|
|
||
|
|
|
|
|
+0.8 bn |
-3% |
|
|
|
||
|
|
|
|
|
1,9 |
|
|
-8% |
|||
|
|
|
|
|
|
|
|
|
|||
21,3 |
|
|
|
61.1 |
|
|
-1.7 bn |
|
|||
|
19,0 |
17,2 |
|
|
54.5 |
-3.8 bn |
|||||
|
|
2,0 |
|
53.7 |
|
|
|
|
|||
|
20,1 |
|
|
28,0 |
51.3 |
49.5 |
|
|
|||
|
|
|
|
2,1 |
2,1 |
47.2 |
|
||||
|
|
|
|
21,9 |
|
1,9 |
1,9 |
43.4 |
|||
|
|
|
|
|
|
|
2,0 |
||||
|
|
|
|
|
|
|
|
|
|
2,0 |
|
32,5 |
|
26,2 |
30,0 |
|
1,7 |
20,6 |
23,8 |
21,0 |
|
|
|
|
|
|
|
|
|||||||
21,8 |
1,3 |
|
22,0 |
20,1 |
|
||||||
|
|
|
12,5 |
|
|
|
|
||||
|
|
|
7,3 |
|
|
|
|
18,3 |
|||
|
|
|
|
3,5 |
|
1,6 |
1,6 |
|
|||
|
|
|
|
|
|
3,3 |
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
||
24,5 |
24,5 |
27,9 |
25,0 |
28,6 |
26,5 |
27,6 |
25,4 |
26,8 |
24,0 |
25,1 |
23,1 |
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
2017 |
2018 |
2018 |
2019 |
2019 |
2020 |
2020 |
2021 |
2021 |
2022 |
2022 |
|
new |
|
new |
|
new |
|
new |
|
new |
|
new |
(1) Investments of electricity retail compani es, service subsidiaries and R&D
Source: Company data, VTB Capital Research
22 November 2018 |
8 |
vk.com/id446425943
Russia
Electric Utilities
RusHydro
Figure 14: RusHydro CMD 19 December 2017
FY2016 analyst and investor meeting
RusHydro Group investment plan 2017-2022, RUB bn, including VAT (1)
|
Overall capacity commissioned in 2016 – 240.9 MW, including: |
||
|
• |
140 MW – Zelenchukska ya hybrid hydro & pumped stor ageplant |
|
|
• 30.6 MW – Zaragizhskaya small hydropower plant |
||
Adjustmentprimarilydue to shift of launch |
• |
70.3 MW – other capacity increase, including uprate from moderniza tion |
|
Overall capex limit of the Group for 2017 estimated at RUB 120 bn (including VAT) |
|||
and funding ti melines of fossil fuel power |
|||
|
|
||
projectsin the Far East, as well as |
Planned capacity increase in 2017 – 607.1 MW, includ ing: |
||
construction of small hydro |
• |
193.5 MW – 1st phaseof Yakutska ya TPP-2 |
|
|
• 320 MW – Nizhne-Bureyskaya HPP |
||
|
• |
93.5 MW – other capacity increase, including uprate from moderniza tion |
|
|
|
|
|
|
117.2 |
118.1 |
|
109.8 |
106.3 |
|
3.5 |
4.1 |
|
|
|
|
|
|
3.5 |
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
31.2 |
40.5 |
|
|
|
81.8 |
|
|
33.6 |
|
30.8 |
|
|
79.6 |
||
|
|
|
|
||
|
3.8 |
|
|
3.0 |
|
|
|
23.4 |
|
|
|
|
21.9 |
|
|
|
|
|
|
21.3 |
|
19.0 |
|
20.9 |
|
|
24.9 |
||
|
|
|
|
||
|
12.5 |
|
|
5.0 |
|
|
|
30.3 |
|
25.3 |
|
|
|
27.7 |
|
||
23.7 |
|
|
16.2 |
||
21.9 |
|
|
|||
|
|
|
|
||
|
|
|
|
|
|
26.1 |
21.7 |
28.8 |
24.5 |
27.5 |
27.9 |
Other
RAO ES Subgroup (rehabiltation and new construction)
Priority projects in the Far East
New construction, HPPs, RusHydro and subsidiaries
Rehabilitation and modernization of HPPs, R usHydro and subsidiaries
|
61.1 |
|
|
|
|
|
53.6 |
2.8 |
47.6 |
53.7 |
47.5 |
51.3 |
|
2.5 |
|
3.1 |
||||
21.9 |
2.2 |
|||||
|
2.8 |
|
2.6 |
|||
18.8 |
|
|
||||
1.3 |
18.6 |
20.6 |
18.9 |
21.0 |
||
|
|
|||||
|
2.4 |
|
||||
4.6 |
6.5 |
|
|
1.3 |
||
|
|
|
|
|||
27.7 |
28.6 |
26.3 |
27.6 |
26.0 |
26.8 |
47.0
2.0
20.1
24.9
2016 |
2016 |
2017 |
2017 |
2018 |
2018 |
2019 |
2019 |
2020 |
2020 |
2021 |
2021 |
2022 |
plan |
fact |
old |
new |
old |
new |
old |
new |
old |
new |
old |
new |
plan |
Source: Company data, VTB Capital Research
Figure 15: RusHydro 1H18 conference call
Group’s investment plan 2018-2023
|
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|
|
Group’s investment plan 2018 -2023, RUB bn (incl. VAT) (1) |
|
|
|
||||||
RusHydro will add >1.5 GW and 1 ths. Gcal/h of capacity through to 2023, incl.: |
|
123.7 |
|
|
|
|
|
|
|
|
|
|
|||||||||||
• |
120 |
MW / 18 Gcal/h |
– Sakhalinska ya GRES-2, coal (1st stage) |
|
|
|
|
|
Other |
|
|
|
|
|
|
||||||||
• |
143 |
MW |
|
– Ust-Srednekanskaya HPP |
|
|
5.3 |
|
|
|
|
Priority thermal projects in the Far East |
|
|
|
||||||||
• |
346 |
MW |
|
– Zaramagskaya HPP-1 (DPM contract ) |
|
|
|
29.8 |
93.8 |
|
New construction |
|
|
|
|
|
|||||||
• |
140 |
MW / 432 Gcal/h |
– Vostochnaya CHPP, gas |
|
|
|
Rehabilitation & modernization (hydro, thermal, grids) |
||||||||||||||||
• |
126 |
MW / 200 Gcal/h |
– Sovetska ya Gavan CHP, coa l |
|
|
|
|
|
|
|
4.1 |
72.6 |
|
|
|
|
|
|
|||||
• |
320 |
MW |
|
– Nizhne-Burey skaya HPP |
|
|
|
|
|
|
|
16.6 |
|
|
|
|
|
|
|||||
• |
300 |
Gcal/h |
|
– Peaking boiler plant at Yakutskaya TPP |
|
|
|
|
|
|
|
|
|
4.0 |
56.2 |
|
|
|
|
|
|||
• |
261 |
MW |
|
– Capacity update /moderniza tion |
|
|
|
54.2 |
31.1 |
0.7 |
48.8 |
|
47.2 |
|
|||||||||
• |
70.5 MW |
|
– Small HPPs (DPM for renewables contracts) |
|
|
|
|
|
25.8 |
3.8 |
|
|
|||||||||||
|
|
|
|
|
|
|
11.6 |
3.7 |
|
3.6 |
|
||||||||||||
Increase over prior projections driv en by additional cost of Nizhne-Burey skaya |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
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|
|
6.1 |
|
6.3 |
|
|||||||||||||
HPP construction and greenfield construction of 5 small hydropower plants |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
contracted under DPM agreement for alternative renewables; |
|
|
|
34.4 |
41.9 |
42.1 |
40.8 |
39.0 |
37.4 |
|
|||||||||||||
CAPEX forecast based on highest capped figures, a nd management will seek to |
|
|
|||||||||||||||||||||
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||||||||||||
optimizeyearly outla ysto ensure stable financial position of the Group. |
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||||||
|
|
|
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
|
||||||||||||||
|
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||||||||||||||
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|
|||
RusHydro Gr oup |
Bog uchanskaya HPP |
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
39.9 GW |
|||||
38.7 GW |
|
38.9 GW |
39.0 GW |
+342 MW |
|
+142 MW |
|
|
+120 MW |
|
+140 MW |
+63 MW |
|
|
|||||||||
|
|
|
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|||
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|
|
|
Ust-Srednekanskaya HPP |
|
|
|
Vostochnaya CHPP |
|
|
|
|
|
|
||||||
35.7 GW |
|
35.9 GW |
36.1 GW |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.9 GW |
|||
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|||||||
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|||
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|
|
|
Zaramagskaya HPP -1 |
|
|
Sakhalinskaya GRES-2 |
|
|
|
|
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|
||||||
|
|
|
|
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|
|||||||
2015 |
|
2016 |
2017 |
Zaramagskaya HPP-1 |
|
Ust'-Srednekanskaya Sakhalinskaya GRES-2 Vostochnaya CHPP |
Modernization |
2018 |
|
||||||||||||||
|
|
|
|
|
|
|
|
HPP |
|
|
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|
|
|
|
|
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|
|||||
|
|
|
(1) CAPEX incl udes 18% VAT and excludes extra group outlays (Boguchanskaya HPP). The investment plan 2018, 2019-23 was reviewed by the Board of Directors on April 2, 2018. |
Current plancould be further reviewed by year-end or in early 2019.
Source: Company data, VTB Capital Research
22 November 2018 |
9 |
vk.com/id446425943 |
RusHydro |
Russia |
|
Electric Utilities |
|
Figure 16: RusHydro 2016 CMD vs. actual and latest capex forecast, RUB bn* |
|
|
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Actual before 2018 and latest from 2018 |
|
|
128.4 |
|
|
+6% |
|
|
|
|
Other |
|
|
Other |
|
|
-19% |
|
|
|
|
|
|
|
RAO ES East Subgroup |
|
|||
|
|
|
|
|
|
RAO ES East Subgroup |
|
|
|||||
|
|
103.8 |
109.1 |
115.6 |
|
|
|
|
4 fossil fuel projects in the Far East |
4 fossil fuel projects in the Far East |
|||
98.0 |
|
1,0 |
|
|
|
|
New hydro construction |
|
New hydro construction |
|
|||
|
3,6 |
|
|
|
|
|
|
121.6Hydro rehab & modernization |
|
Hydro rehab & modernization |
|||
3,2 |
|
|
34,5 |
|
-13% |
|
|
|
|||||
|
|
|
73.2 |
|
|
|
|
|
|
|
|||
|
|
28,4 |
|
|
|
-15% |
69.1 |
-32% |
|
|
|
||
21,1 |
|
|
|
63.8 |
59.4 |
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||
23,2 |
|
24,4 |
|
25,1 |
|
0,9 |
50.5 |
|
47.2 |
47.5 |
|
|
|
|
|
|
|
|
|
|
47.2 |
||||||
|
|
|
|
|
20,8 |
|
|
|
|||||
|
|
|
|
26,2 |
|
|
|
1,0 |
|
1,2 |
1,3 |
|
3.6 |
21,0 |
|
|
|
|
|
|
16,7 |
|
2.0 |
||||
|
21,3 |
|
|
13,6 |
|
|
17,2 |
17,3 |
|||||
|
|
|
|
|
|
3,6 |
|
20.1 |
6.3 |
||||
|
|
|
|
|
|
|
|
|
0,2 |
0,2 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||
29,5 |
|
26,1 |
|
28,8 |
|
28,5 |
|
29,2 |
|
28,6 |
28,7 |
24.9 |
37.4 |
|
|
|
|
|
|
||||||||
2015 |
2016 |
2016 |
2017 |
2017 |
2018 |
2018 |
2019 |
2019 |
2020 |
2020 |
2021 |
2022 |
2023 |
|
|
корр. |
|
корр. |
|
корр. |
|
корр. |
|
корр. |
|
|
|
|
|
new |
|
new |
|
new |
|
new |
|
new |
|
|
|
*Difference between guidance for 2018 and latest bond prospectus guidance moved to 2019
Source: Company data, VTB Capital Research
Despite many assurances that capex would moderate – which should have at least started already – RusHydro’s capex in 2018 remains elevated, while the most recent guidance for 2019 is yet again higher than management’s previous assurances. This can be easily explained (by delays of investments in Far Eastern greenfield projects, cost inflation, additional maintenance needs) but the reasons are irrelevant to our point. What is important is that RusHydro managers seem unable to deliver capex moderation and that we have to accept this reality.
Figure 17: RusHydro capex evolution
RUBmn
|
RusHydro investment programme in 2013* |
|
RusHydro investment programme in 2012* |
|
RusHydro investment programme in 2011* |
|
|
|
|||
|
RusHydro investment programme in 2008 |
|
RusHydro investment programme in 2006 |
|
RusHydro investment programme in 2017* |
|
|
|
|||
|
RusHydro investment programme in 2018* |
|
RusHydro investment programme in 2015* |
|
RusHydro investment programme in 2016* |
|
|
|
|||
|
RusHydro investment programme in 2014* |
|
Operating CF |
|
Actual (current adj for 2018F-2022F) |
|
VTB forecast |
|
RusHydro investment programme in middle 2018* |
|
|
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018F |
2019F |
2020F |
2021F |
2022F |
2023F |
Source: Company data, VTB Capital Research
2. The Russian Far East cannot pay for itself; external resources will continue to be channelled there.
Per figures 18-19, we note that RAO Vostoka continues to use all the financial resources RusHydro generates from its hydro assets. As such, taking into consideration the cost of ‘maintaining’ RAO Vostoka, including its opex, capex, interest expenses and taxes, we note that only 64% of this bill was footed by Far Eastern consumers themselves. Another 14% was by consumers in European Russia and Siberia through the subsidy mechanism. However, 22% of the bill for maintaining the electricity system in Russia’s Far East is paid by RusHydro shareholders.
22 November 2018 |
10 |
vk.com/id446425943
Russia
Electric Utilities
RusHydro
Figure 18: Far Eastern assets total costs vs. financing, RUB mn
Net finance |
|
|
|
|
|
17,092 |
RusHydro |
|
|
expenses |
|
|
||
Capex |
24,237 |
shareholders' |
53,035 |
|
|
|
|
subsidy |
|
|
|
|
|
|
|
|
|
|
|
Market |
35,000 |
|
subsidy |
||
|
Opex 204,566
Tariff 157,860 sourced
Costs |
Financing |
Source: Company data, VTB Capital Research
RAO Vostoka’s capex is three times larger than the dividends RusHydro pays and its EBITDA is even less than the subsidies it receives from the state. Indeed, RAO Vostoka’s capex is often higher than its EBITDA. These observations clearly indicate that RAO Vostoka’s profitability cannot support its investment aspirations. Although we acknowledge the strategic importance of the enterprise and the clear government role in delivering on its main goal in the sector – ensuring uninterrupted electricity supply in the region – we wonder why RusHydro minority shareholders have to foot this bill.
Figure 19: RusHydro 2018F adj. EBITDA flow vs. cash use, RUB mn
|
Assets |
|
|
Revenue |
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Cash costs |
|
Cash flow use |
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Financing deficit |
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DPM RUB 6.3bn |
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Cash costs |
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RUB 104.6bn |
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KOM RUB 24.6bn |
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NWC RUB 11.4bn |
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Hydro |
assets |
|
|
RSV RUB 76.4bn |
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||||
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|
RUB |
851.9bn |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incl. |
PPE |
|
|
Regulated RUB 13.7bn |
|
|
|
|
|
|
Tax RUB 10.2bn |
|
|
|
||
|
|
|
RUB |
758.1bn |
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Net finance exp |
|
Debt raise |
||
|
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|
Retail RUB 65.3bn |
|
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||||||
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|
RUB 7.6bn |
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Adj EBITDA – Hydro |
|
|
|
RUB 66.3bn |
|||
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|||
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|
RUB 93.6bn |
|
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||
|
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Other RUB 7.4bn |
|
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Forward payment |
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|
||||
Total |
assets |
|
|
|
|
|
|
|
|
Total Adj EBITDA |
|
|
RUB 4.5bn |
|
|
|
||||
|
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||||||
RUB |
1,040.7bn |
|
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|
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|
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|
RUB 121.0bn |
|
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|
Regulated RUB 114.7bn |
|
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|||||
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Dividends RUB 11.2bn |
|
|
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|||
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|
Adj EBITDA – Far |
East |
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||
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|
RUB 27.3bn |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heat RUB 43.1bn |
|
|
|
|
Far East capex |
|
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|
||||
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||||||
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|
Far Eastern non- |
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|
RUB 24.2bn |
|
|
Share issue |
||||
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|||||||||
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hydro assets |
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|||
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Other RUB 20.6bn |
|
|
|
|
|
|
|
Hydro capex |
|
||||||
|
|
|
RUB 188.7bn |
|
|
|
|
|
|
|
|
|
|
|
RUB 4.0bn |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
RUB 57.0bn |
|
|
||||||
|
|
|
|
Incl. PPE |
|
|
|
|
|
|
|
|
|
|
|
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|||
|
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|
|
|
||
|
|
|
|
|
|
Subsidies RUB 35bn |
|
|
|
|
|
|
Debt repayment |
|
|
|
||||
|
|
|
|
RUB 73.8bn |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RUB 83.5bn |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash costs
RUB 186.2bn
Source: Company data, VTB Capital Research
22 November 2018 |
11 |
vk.com/id446425943 |
RusHydro |
Russia |
|
Electric Utilities |
|
Nevertheless, when making assumptions on the future of RAO Vostoka, we have come to terms with the paradigm that i) RAO Vostoka will continue to be part of RusHydro; ii) the state will continue to assume that the burden of RAO Vostoka maintenance is RusHydro’s to bear; and iii) RAO Vostoka’s investment will not moderate.
We are aware of the proposal of the Ministry of Economic Development for a special fund to finance modernisation, expansion and even the introduction of renewable energy in the Russian Far East. However, we note that RusHydro would continue to be the agent of such investments – i.e. would formally employ its capital, irrespective of where such capital came from – and, taking into account the state-induced nature of such financing, we would expect returns (if any) on such capital employment to remain muted.
3. Consumers are not paying the full cost of such investments. Therefore, there is no price sensitivity to them.
An analysis of the federal project to commission four projects in the Russian Far East clearly indicates that the NPV of such projects is negative – and no wonder, considering these capacities are getting the traditional ‘old capacity’ tariff, while their price tags exceed even the average for new greenfield projects in Russia. These projects are no exception: besides Federal projects, RusHydro regularly undertakes substantial investments, albeit with much lower publicity.
Figure 20: NPV of key projects in the Russian Far East, RUB mn
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018F |
2019F |
2020F |
2021F |
2022F |
2023F |
2024F |
2025F |
2026F2041F 2042F 2043F 2044F 2045F |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40F |
|
|
|
|
Year |
|
|
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
26 |
27 |
28 |
29 |
30 |
|
Capacity, MW |
- |
- |
- |
120 |
120 |
313 |
313 |
433 |
|
433 |
553 |
553 |
553 |
553 |
553 |
|
553 |
553 |
553 |
553 |
553 |
|
|||||||||||||||||||
|
Gas |
|
- |
|
- |
|
- |
|
- |
|
- |
|
193 |
|
193 |
|
193 |
|
193 |
|
313 |
|
313 |
|
313 |
|
313 |
|
313 |
|
|
|
313 |
|
313 |
|
313 |
|
313 |
|
313 |
|
|
Coal |
- |
- |
- |
120 |
120 |
120 |
120 |
240 |
|
240 |
240 |
240 |
240 |
240 |
240 |
|
240 |
240 |
240 |
240 |
240 |
|
|||||||||||||||||||
|
Revenue |
- |
- |
- |
- |
1,391 |
5,047 |
5,884 |
8,752 |
|
9,199 |
11,488 12,050 12,678 13,340 14,037 |
|
29,952 31,382 32,881 34,451 36,098 |
|
|||||||||||||||||||||||||||
|
Costs |
- |
- |
- |
- |
(2,664) |
(4,229) (5,162) (7,538) (8,402) (9,935) (10,043)(10,179)(10,333)(10,505) |
(11,249)(11,575)(11,919)(12,281)(12,662) |
||||||||||||||||||||||||||||||||||
|
Self-consumption |
- |
- |
- |
- |
75 |
130 |
152 |
373 |
|
393 |
581 |
611 |
646 |
683 |
721 |
|
1,604 1,684 1,769 1,857 1,950 |
|
|||||||||||||||||||||||
|
Fuel cost |
|
- |
|
- |
|
- |
|
- |
|
656 |
|
1,442 |
|
1,613 |
|
2,669 |
|
2,759 |
|
3,860 |
|
4,007 |
|
4,165 |
|
4,330 |
|
4,502 |
|
|
|
6,437 |
|
6,690 |
|
6,953 |
|
7,226 |
|
7,510 |
|
|
O&M |
|
|
|
|
|
|
|
272 |
549 |
543 |
827 |
|
857 |
1,190 |
1,233 |
1,281 |
1,331 |
1,383 |
|
- |
- |
- |
- |
- |
|
||||||||||||||||
|
Depreciation |
- |
- |
- |
- |
1,661 |
2,108 |
2,854 |
3,669 |
|
4,392 |
4,304 |
4,192 |
4,087 |
3,990 |
3,899 |
|
3,207 3,200 3,198 3,198 3,202 |
|
|||||||||||||||||||||||
|
EBIT |
|
|
|
|
|
|
|
(1,273) |
818 |
721 |
1,213 |
|
797 |
1,553 |
2,007 |
2,499 |
3,007 |
3,532 |
|
18,704 |
19,807 |
20,962 |
22,170 |
23,436 |
|
||||||||||||||||
|
EBITDA |
|
|
|
|
|
|
|
388 |
2,925 |
3,575 |
4,882 |
|
5,189 |
5,857 |
6,199 |
6,586 |
6,997 |
7,432 |
|
21,910 |
23,007 |
24,159 |
25,368 |
26,638 |
|
||||||||||||||||
|
NOPAT |
|
|
|
|
|
|
|
|
|
(1,273) |
|
654 |
|
577 |
|
971 |
|
638 |
|
1,242 |
|
1,606 |
|
1,999 |
|
2,406 |
|
2,826 |
|
|
|
14,963 |
|
15,846 |
|
16,769 |
|
17,736 |
|
18,749 |
|
|
Depreciation |
- |
- |
- |
- |
1,661 |
2,108 |
2,854 |
3,669 |
|
4,392 4,304 |
4,192 |
4,087 |
3,990 |
3,899 |
|
3,207 3,200 3,198 3,198 3,202 |
|
||||||||||||||||||||||||
|
Capex |
(1,017) (1,780) (10,763)(19,661)(10,593)(17,034)(19,153)(18,136) (2,627) (2,056) (2,098) (2,141) (2,185) (2,229) |
|
(3,080) (3,143) (3,207) (3,273) (3,339) |
|
|||||||||||||||||||||||||||||||||||||
|
FCFF |
|
(1,017) |
|
(1,780) |
|
|
|
(10,763)(19,661)(10,205)(14,272)(15,721)(13,496) |
|
|
|
2,403 |
|
3,490 |
|
3,699 |
|
3,945 |
|
4,210 |
|
4,496 |
|
|
|
15,089 |
|
15,903 |
|
16,760 |
|
17,662 |
|
18,611 |
|
||||||
|
WACC |
17% |
17% |
17% |
17% |
17% |
14% |
14% |
14% |
|
14% |
15% |
14% |
14% |
14% |
14% |
|
14% |
14% |
14% |
14% |
14% |
|
|||||||||||||||||||
|
Discount factor |
1.00 1.00 |
1.00 1.00 0.85 |
0.76 |
0.68 |
0.59 |
|
0.52 |
0.44 |
0.39 |
0.35 |
0.31 |
0.27 |
|
0.04 |
0.03 |
0.03 |
0.02 |
0.02 |
|
||||||||||||||||||||||
|
Discounted FCFF (1,017) (1,780) (10,763)(19,661) (8,723) (10,908)(10,602) (7,917) |
1,233 |
1,535 |
1,444 |
1,360 |
1,270 |
1,187 |
|
521 |
482 |
447 |
413 |
383 |
|
NPV (47,204)
Source: Company data, VTB Capital Research
4. Even market-oriented investments tend to slip away into regulatory territory.
On 7 November, Nikolai Shulginov, the CEO of RusHydro, noted that the terms for the modernisation of capacities in the Russian Far East were not yet clear and could differ from those for the modernisation of thermal capacities in the Pricing Zones. And despite the fact RusHydro expects a 14% guaranteed return attached to the projects, in line with other markets, the company would be ready to accommodate the projects with whatever return the government is to provide.
Since the announcement of RusHydro’s intention to squeeze into the modernisation programme of fossil-fuel generators in Russia, we considered such developments as positive. However, the newsflow on these projects over recent months has significantly tempered our bullishness.
The price tags announced on individual projects already look high. At times when other gencos estimate modernisation at USD 400-500/kW and greenfield construction at USD 800-1,800/kW, prices on Russian Far East DPM-2 projects published in Kommersant on 3 October look 100-140% higher than benchmarks.
22 November 2018 |
12 |
vk.com/id446425943
Russia
Electric Utilities
RusHydro
Figure 21: RusHydro capex expectations
Power plant |
Capacity, |
Capex, |
Our capex |
Possible capex |
Benchmark capex |
|
MW |
RUB bn |
estimate, RUB bn |
per kW, USD/kW |
per kW, USD/kW |
Modernisation |
|
|
|
|
|
Komsomolskaya CHP-2 |
120 |
9.4 |
4.0 |
1,145 |
482 |
Vladivostokskaya CHP-2 |
210 |
14.6 |
6.9 |
1,016 |
482 |
New construction |
|
|
|
|
|
Artemovskaya CHP |
455 |
65.9 |
56.0 |
2,117 |
1,800 |
Khabarovskaya CHP |
344 |
34.5 |
42.4 |
1,466 |
1,800 |
Yakutskaya GRES |
145 |
9.5 |
7.9 |
958 |
800 |
Source: Company data, VTB Capital Research
The government is considering providing a guaranteed return on investments only on the core portion of projects, but not on auxiliary works, such as grid connection expenditures. RIA Novosti, quoting sources at the Ministry of Energy, reported on 28 September 2018 that the government was considering abolishing the guaranteed return mechanism for some of the investments into the modernisation and construction of power units in the Russian Far East. According to the ministry, all auxiliary investments (such as on the administrative buildings, warehouses, grid connection fees and heat distribution networks which are to be constructed) are out of scope of the DPM-2 guaranteed return on the investment mechanism and thus will not have any payback profile. It is hard to imagine a similar approach elsewhere: a private sector real estate developer would be unlikely to build an apartment block if it were only paid for the parking level. However, taking into consideration the state ownership status of RusHydro, we cannot fully rule out such situation.
On 7 November 2018, Shulginov announced that he ws uncertain that RusHydro would manage to obtain the same 14% level of guaranteed returns on its projects, as other fossil-fuel generators in ‘mainland’ Russia. However, the CEO quickly added that the company would be ready to undertake projects at whatever guaranteed return the government was ready to offer.
All three items suggest to us that the economics of the Russian Far East DPM projects are not as robust as we had anticipated earlier. In our model, we have thus lowered the level of guaranteed return to 8.5% – which we believe the state might view as a level that would allow RusHydro to cover the cost of debt required for such projects. However, it is still considerably below the company’s own WACC of 14-15%.
Summary
As a result, we arrive at two conclusions. First, that RusHydro’s capex will remain elevated. Second, the economics of such projects will continue to remain sub-par. It is these assumptions that have pushed down our 12-month Target Price.
Figure 22: Capex forecast change
|
120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
72% 72% 72% 72% 72% |
|
80% |
||||||||||||
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60% |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
80,000 |
|
|
|
|
25% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40% |
||||
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
||||||
RUBmn |
|
|
|
|
|
|
|
|
|
|
|
-10%-10% |
|
|
|
|
|
|
|
|
|
|
|
20% |
||||
60,000 |
0% |
|
|
|
|
-3% |
|
|
|
|
|
|
|
|
|
|
|
0% % |
||||||||||
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|||||||
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
40,000 |
|
|
-22% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-20% |
||||
|
|
|
|
71,480 |
81,271 |
113,543 |
109,561 |
90,579 |
86,540 |
100,000 |
100,000 |
100,000 |
100,000 |
100,000 |
100,000 |
|||||||||||||
|
20,000 |
-40% |
||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
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|
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|
||||
|
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|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-60% |
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
2017 |
|
2018F |
|
2019F |
|
2020F |
|
2021F |
|
2022F |
|
2023F |
|
2024F |
|
2025F |
|
2026F |
|
2027F |
|
2028F |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|||||||||||||
|
|
|
New capex, lhs |
|
|
Previous capex, lhs |
|
Change, rhs |
||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||
|
|
|
|
|
|
Source: Company data, VTB Capital Research
Figure 23: Adj. EBITDA forecast change
|
250,000 |
|
|
|
|
|
|
100% |
|
|
|
|
|
|
|
73% |
80% |
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
|
|
|
60% |
|
|
|
|
|
|
|
|
|
RUBmn |
150,000 |
|
|
|
|
|
|
40% |
-16% |
-10% |
|
-16% |
0% % |
||||
|
|
-3%-9% |
|
|
|
-8%-7%-3% |
20% |
|
|
100,000 |
-8% |
|
|
||||
|
|
|
|
-18% |
|
-20% |
||
|
|
|
|
|
|
|
|
50,000 |
97,821 |
114,609 |
112,499 |
119,573 |
128,239 |
134,921 |
143,621 |
164,034 |
175,175 |
188,619 |
200,861 |
218,571 |
-40% |
||||||||||||
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-60% |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-80% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
2018F |
2019F |
2020F |
2021F |
2022F |
2023F |
2024F |
2025F |
2026F |
2027F |
2028F |
||
|
Adj. EBITDA new, lhs |
|
Adj. EBITDA previous, lhs |
Change, rhs |
|||||||||
|
|
||||||||||||
|
|
Source: Company data, VTB Capital Research
22 November 2018 |
13 |