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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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RUBmn

40,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40,000)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15%

 

 

 

 

 

 

 

 

 

14%14%

14%

 

 

 

 

 

 

 

 

 

 

 

11%

 

 

 

 

12%

 

 

 

 

 

 

 

 

 

 

 

 

 

9%

 

 

 

 

 

 

 

 

 

 

 

 

 

10%

 

 

7%

 

9%

8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5%

3%

 

 

3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

2015

2016

2017

2018F

2019F

 

2020F

2021F

 

2022F

2023F

 

2024F

 

2025F

 

2026F

 

2027F

2028F

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

120

 

 

114

110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

100

100

100

 

100

 

100

100

 

 

100

 

 

12

29

91

87

 

 

 

 

81

81

 

13

 

 

 

 

 

 

 

RUBbn

 

29

 

 

 

 

 

 

 

 

80

-

-

29

3

 

 

 

 

 

 

 

 

 

 

 

 

60

3

19

18

 

 

 

 

 

42

42

 

42

 

42

42

 

 

 

5

 

3

29

29

29

 

 

 

 

 

22

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

3

3

3

 

3

 

3

3

 

 

 

17

 

 

3

31

 

 

 

 

 

40

32

36

32

33

33

33

 

33

 

33

33

 

 

18

27

 

 

 

 

 

 

 

-

-

 

-

-

-

 

-

 

-

-

 

 

20

 

 

 

 

10

 

 

 

 

 

20

20

19

18

18

5

 

5

5

5

 

5

 

5

5

 

 

-

17

17

17

17

 

17

 

17

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

2018F

2019F

2020F

2021F

2022F

 

2023F

2024F

2025F

2026F

2027F

2028F

 

 

 

 

 

 

Additional capex

 

 

 

 

 

 

 

Far East modernisation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

RAO Vostoka

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key projects in the Far East

 

 

 

 

 

New construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hydro rehab and modernisation

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Net

 

 

Dividend

 

FCFF

 

 

 

x

 

 

x

 

USD/kW

 

EBITDA, x

 

 

margin

 

 

margin

 

 

 

yield

 

 

yield

 

 

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%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.6%

 

 

 

-0.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

optimizeyearly outla ysto ensure stable financial position of the Group.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

2019

2020

2021

2022

2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RusHydro Gr oup

Bog uchanskaya HPP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39.9 GW

38.7 GW

 

38.9 GW

39.0 GW

+342 MW

 

+142 MW

 

 

+120 MW

 

+140 MW

+63 MW

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ust-Srednekanskaya HPP

 

 

 

Vostochnaya CHPP

 

 

 

 

 

 

35.7 GW

 

35.9 GW

36.1 GW

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36.9 GW

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zaramagskaya HPP -1

 

 

Sakhalinskaya GRES-2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2016

2017

Zaramagskaya HPP-1

 

Ust'-Srednekanskaya Sakhalinskaya GRES-2 Vostochnaya CHPP

Modernization

2018

 

 

 

 

 

 

 

 

 

HPP

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

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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

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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

 

 

 

Cash costs

 

Cash flow use

 

 

Financing deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DPM RUB 6.3bn

 

 

 

Cash costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RUB 104.6bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KOM RUB 24.6bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NWC RUB 11.4bn

 

 

 

 

 

 

Hydro

assets

 

 

RSV RUB 76.4bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RUB

851.9bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incl.

PPE

 

 

Regulated RUB 13.7bn

 

 

 

 

 

 

Tax RUB 10.2bn

 

 

 

 

 

 

RUB

758.1bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net finance exp

 

Debt raise

 

 

 

 

 

 

 

 

Retail RUB 65.3bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RUB 7.6bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adj EBITDA – Hydro

 

 

 

RUB 66.3bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RUB 93.6bn

 

 

 

 

 

 

 

 

 

 

 

 

 

Other RUB 7.4bn

 

 

 

 

 

Forward payment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

assets

 

 

 

 

 

 

 

 

Total Adj EBITDA

 

 

RUB 4.5bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RUB

1,040.7bn

 

 

 

 

 

 

 

 

 

 

RUB 121.0bn

 

 

 

 

 

 

 

 

 

 

 

 

Regulated RUB 114.7bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends RUB 11.2bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adj EBITDA – Far

East

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RUB 27.3bn

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Heat RUB 43.1bn

 

 

 

 

Far East capex

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Far Eastern non-

 

 

 

 

 

 

 

 

 

 

RUB 24.2bn

 

 

Share issue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hydro assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other RUB 20.6bn

 

 

 

 

 

 

 

Hydro capex

 

 

 

 

RUB 188.7bn

 

 

 

 

 

 

 

 

 

 

 

RUB 4.0bn

 

 

 

 

 

 

 

 

 

 

 

 

RUB 57.0bn

 

 

 

 

 

 

Incl. PPE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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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

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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%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RUBmn

 

 

 

 

 

 

 

 

 

 

 

-10%-10%

 

 

 

 

 

 

 

 

 

 

 

20%

60,000

0%

 

 

 

 

-3%

 

 

 

 

 

 

 

 

 

 

 

0% %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-60%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2018F

 

2019F

 

2020F

 

2021F

 

2022F

 

2023F

 

2024F

 

2025F

 

2026F

 

2027F

 

2028F

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-60%

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-80%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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