vk.com/id446425943
Utilities outlook
Energising investors in 2019
We update our DCF-derived TPs and ratings for the utility stocks under our coverage, downgrading Mosenergo to HOLD (from Buy), while upgrading RusHydro to BUY (from Hold), leaving other ratings unchanged. Although market sentiment in 2018 weakened towards the sector, we believe important milestones in 2019 could result in improved investor perception of the utility names under our coverage.
Sector fundamentals remain strong…
We believe Russia’s generation companies (Gencos) boast sustainable balance sheet strength, as we forecast solid FCF generation during the upcoming modernisation period, with high FCF yields averaging 20% in 2018-2022E. We expect the Gencos under coverage (excluding RusHydro) to enter a new modernisation capex cycle, starting from 2021, with a consolidated cash position exceeding their total required modernisation capex
…but market sentiment has been poor
However, the market continues to overlook this fundamental strength, in our view, as the government is yet to approve the final modernisation plan, the regulator has not yet carried out the first round of modernisation and capacity auctions (KOM), and conservative dividend policies are still in place at InterRAO and Gazprom Gencos. These factors weighed on the stocks in 2018, we believe, despite stronger electricity market fundamentals last year.
Important milestones in 2019 could lift sector valuation
We expect modernisation and KOM auctions to be carried out in 1H19, while InterRAO should reveal its new five-year strategy in late 2H19. FY18 figures should indicate if lower impairment charges will occur in the future. We also expect a decision on regulatory parameters for Umeme’s licence/concession, as well as possible changes in grid regulation in Russia and more details on Rosseti’s digitisation programme. We believe these developments could clarify future FCF and result in improved investor sentiment towards utility stocks under our coverage.
Reducing TPs for five companies
We update some of our DCF models based on: 1) recently published 9M18 IFRS figures; 2) electricity market dynamics in 4Q18; 3) changes to our macro assumptions for the sector, which influence DPM (capacity supply agreement) tariffs; 4) rolling forward our DCF models by one year; and 5) lowering our dividend payout ratio assumptions for some companies.
We downgrade Mosenergo to HOLD; upgrade RusHydro to BUY
As we struggle to see any short-term triggers and with a lower TP, we downgrade Mosenergo to HOLD. We upgrade RusHydro to BUY, and maintain our other ratings. We believe sector fundamentals are still strong, but do not expect this to filter through to valuations until the results of the modernisation and KOM auctions are known, which should happen in 1H19. InterRAO is still our favoured play in the Russian utility space, despite its unclear strategy regarding its significant cash pile and ‘quasi’ treasury stock.
Sector update
Equity Research 9 January 2019
Utilities
EMEA
Sergey Beiden
+7 (495) 258-7770 x4205 SBeiden@rencap.com
InterRAO
Bloomberg |
IRAO RM |
TP, RUB |
7.98 (previously 7.85) |
Current price, RUB |
3.97 |
Upside potential, % |
101 |
Rating |
BUY |
RusHydro |
|
Bloomberg |
HYDR RM |
TP, RUB |
0.77 (previously 0.77) |
Current price, RUB |
0.49 |
Upside potential, % |
59 |
Rating |
BUY (previously Hold) |
Enel Russia |
|
Bloomberg |
ENRU RM |
TP, RUB |
1.67 (previously 1.70) |
Current price, RUB |
1.041 |
Upside potential, % |
60 |
Rating |
BUY |
Unipro |
|
Bloomberg |
UPRO RM |
TP, RUB |
2.62 (previously 2.57) |
Current price, RUB |
2.60 |
Upside potential, % |
1 |
Rating |
HOLD |
OGK-2 |
|
Bloomberg |
OGKB RM |
TP, RUB |
0.52 (previously 0.54) |
Current price, RUB |
0.32 |
Upside potential, % |
62 |
Rating |
BUY |
TGK-1 |
|
Bloomberg |
TGKA RM |
TP, RUB |
0.0134 (previously 0.0144) |
Current price, RUB |
0.0083 |
Upside potential, % |
61 |
Rating |
BUY |
Mosenergo (TGK-3) |
|
Bloomberg |
MSNG RM |
TP, RUB |
3.09 (previously 3.62) |
Current price, RUB |
2.06 |
Upside potential, % |
50 |
Rating |
HOLD (previously Buy) |
Federal Grid Company |
|
Bloomberg |
FEES RM |
TP, RUB |
0.197 (previously 0.192) |
Current price, RUB |
0.15 |
Upside potential, % |
32 |
Rating |
BUY |
Rosseti (common) |
|
Bloomberg |
RSTI RM |
TP, RUB |
0.73 (previously 0.74) |
Current price, RUB |
0.79 |
Upside potential, % |
-7 |
Rating |
HOLD |
Rosetti (preferred) |
|
Bloomberg |
RSTIP RM |
TP, RUB |
1.4 (previously 1.31) |
Current price, RUB |
1.4 |
Upside potential, % |
0 |
Rating |
HOLD |
Umeme |
|
Bloomberg |
UMEM |
TP, UGX |
400 |
Current price, UGX |
320 |
Upside potential, % |
25 |
Rating |
HOLD |
Prices in this report at close 7 January 2019.
Source: Bloomberg, Renaissance Capital estimates
Important disclosures are found at the Disclosures Appendix. Communicated by Renaissance Securities (Cyprus) Limited, regulated by the Cyprus Securities & Exchange Commission, which together with non-US affiliates operates outside of the USA under the brand name of Renaissance Capital.
vk.com/id446425943
Contents
Investment summary |
3 |
Sentiment weighs despite positive fundamentals |
3 |
…though we acknowledge lack of clarity on dividends |
6 |
Valuation |
7 |
Risks |
10 |
Changes in assumptions and market trends |
11 |
Bringing assumptions closer to Minecon’s tariff guidance… |
11 |
…as the spread between electricity prices and tariff growth diminishes… |
12 |
…and adjusting our forecast for DPM returns based on a zero-coupon rate |
13 |
Modernisation saga likely to end in 1H19… |
14 |
While improved market fundamentals could result in lower impairments |
15 |
MRSK performance in 2019 will mostly be defined in 4Q18 results, we believe |
17 |
Changes to forecasts based on 9M18 results… |
18 |
…and changes to our WACC assumptions |
18 |
Changes to ratings |
20 |
Mosenergo |
20 |
RusHydro |
21 |
African utilities |
22 |
Disclosures appendix |
34 |
Renaissance Capital
9 January 2019
Utilities
2