vk.com/id446425943

Russia

Equities

Norilsk Nickel – Investor Day 2018; raising estimates, while upside from growth projects remains, of 20 November, by Dmitry Glushakov et al

Rusagro – Sugar Rush!, of 21 November, by Nikolay Kovalev et al

FSK – 9mo18; vote of confidence, of 19 November, by Vladimir Sklyar et al

RusHydro – Taking from Peter to Pay for Paul, of 22 November, by Vladimir Sklyar et al

OGK-2 – 9mo18; falling victim to market surplus, of 19 November, by Vladimir Sklyar et al

Qiwi – Investor Day; positive mediumterm outlook, of 22 November, by Vladimir Bespalov et al

Week Endnotes

On companies

Our fundamental ratings and 12-month Target Prices for the stocks are contained in Figure 7.

Investment views updated this week

12-month Target Price changes

On the back of the upside to earnings provided by Norilsk Nickel during its Investor Day, we raised our 12-month Target Price 13% to USD 25.70 (Buy reiterated). Due to the balanced capital allocation, we see Norilsk continuing to pay an attractive dividend yield of 13-16%, avoiding a leverage overshoot. As its premium commodity basket is the best exposed to the global trend towards cleaner transport, in our view, details on the growth projects might help to extract more value.

The new marketing year sees an improvement in operational economics at Rusagro after two seasons of a downbeat environment. The key tailwinds come from the lower supply of soft commodities in Russia, higher global and local prices, a weaker local currency and the near-term launches of greenfield capacities. For 2019F, we see EBITDA up 33% YoY at RUB 23bn and profitability returning to our mid-cycle forecast of 23%. The strategy update featured an upbeat tone on the expansion, attractive M&A opportunities, and exports to the Asian markets. We raised our 2018-22F estimates 6% across key P&L lines and increased our 12-month Target Price 7% to USD 14.50 (Buy reiterated). The stock demands 2019F EV/EBITDA of 4.8x and we consider it as not fully reflecting the recovering business and strong focus on organic growth.

FSK’s 9mo18 IFRS results, released on 16 November, were decent on the underlying profitability side, showing the resilience of the company’s profits. Limited investment needs for modernisation, a sustainable profit outlook and attractive dividend yield levels above the MSCI Russia average make FSK’s story a vote of confidence from investors, in our view. Having updated our model and rolled it forward into 2019, we derived a new 12-month Target Price of RUB 0.20 (up 5%): Buy reiterated.

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 is RUB 0.71; Buy reiterated.

OGK-2’s 9mo18 IFRS results, reported on 16 November, were business as usual, as the company strolls across the profitability plateau which is due to last until modernisation kicks in. We update our macro assumptions and note that OGK2’s valuation falls victim to our new outlook on day-ahead prices, which we now expect to trail gas prices throughout the forecasting period on the back of capacity surplus. This, dividend assumptions and higher capex expectations push our fair value down. Having taken a closer look at the prospects for 2019 and rolled our model forward into next year, we derived a new 12-month Target Price of RUB 0.45 (down 25%): Buy reiterated.

In focus

During its Investor Day on Monday, Qiwi presented an upbeat view of its business prospects and profitability outlook, which creates notable upside risks to our mediumterm forecasts. The company’s plan to distribute up to 70% of adjusted net profit as dividends, most likely from 1Q19, also exceeds our expectations. Although Qiwi still has to deliver on its targets, we believe that these developments bode well for our positive view on the company's investment case. Buy reiterated with a 12-month Target Price of USD 25.00.

23 November 2018

4

vk.com/id446425943	Week Endnotes
Russia
Equities

PhosAgro – Surprisingly strong dividends, of 21 November, by Elena Sakhnova et al

PhosAgro – 3Q18 IFRS; trick and treat, of 23 November, by Elena Sakhnova et al

Novatek – commissions third Yamal LNG train – one year ahead of schedule, of 23 November, by Dmitry Loukashov et al

Gazprom and TMK – Gazprom signs RUB 41.2bn contract for 500kt LDP delivery with Zagorsk Pipe Plant – average price implies 3.4% discount to contract with TMK, of 22 November, by Ekaterina Rodina et al

Gazprom – EU operators might start booking 15.8bcm/a – which could come from Russia via TurkStream from 2020, of 22 November, by Ekaterina Rodina et al

Aeroflot – Canadian low-cost story of success, of 19 November, by Elena Sakhnova et al

X5 Retail Group – update on south region roll-out – 20% of all openings - vague return prospects due to competition and strong unorganised operators, of 21 November, by Maria Kolbina et al

PhosAgro’s BoD has recommended 3Q18 dividends at RUB 72/share, which is 60% above our projection (RUB 45/share) and implies a 7% NTM DY. Under a 50% payout, this assumes adjusted net profit at RUB 18.6bn on today's 3Q18 FIFRS results, 53% above the Interfax consensus forecast (20 November) of RUB 12.2bn. After the upbeat announcement of dividends, the company beat consensus expectations on the top line, EBITDA and net income. As a result, dividends imply a 72% payout from adjusted net profit while the company has been paying 47-50% of adjusted net profit since 3Q15.

Also in the news

Novatek announced the commissioning of the third Yamal LNG train, with nameplate capacity of 5.5mmt/a, according to a company press release. Therefore, the total capacity of the three trains at the Yamal LNG plant has reached 16.5mmt/a, making Novatek the largest LNG producer in Russia. We welcome the company’s ability to launch a project of such complexity ahead of schedule, and thus deem the news positive for the name. We note that, during the 3Q18 conference call, the company guided for the third LNG line to be launched in December, one year ahead of the initial schedule. Therefore, we see the third line starting in November as slightly positive for Novatek’s earnings in 2018, as it might add some 1% to Yamal LNG’s EBITDA.

Gazprom has signed a contract for the delivery of 500kt of large diameter pipes (LDP) with Zagorsk Pipe Plant, Vedomosti reports, estimating the value of the contract at RUB 41.2bn (USD 0.6bn). According to Interfax, that makes it the largest single contract for the supply of LDP that Gazprom has ever signed. The contract implies a weighted average price (net of VAT) of RUB 65,000/t, which is the lowest price that Gazprom has managed to get from pipe plants in recent years, the paper writes. Gazprom recently signed a similar contract for RUB 21bn (USD 0.3bn) worth of deliveries of 255kt LDP with TMK, which are to be used for the expansion of the Sakhalin-Khabarovsk-Vladivostok pipeline.

Gazprom has chosen the route for the second line of Turkish Stream and is to supply gas to Europe through Bulgaria and the Republic of Serbia starting from 2020, then through Hungary and Slovakia starting from 2021 and 2H22, respectively, according to Kommersant. Gas transportation system operators in Bulgaria, Republic of Serbia, Hungary and Slovakia might start booking gas volumes as a part of the ‘open season’ procedure, the paper reports. The capacities of Turkish Stream pipelines are 15.8bcm/a through Bulgaria, 11bcm/a through Serbia (increasing to 11bcm/a in 2021 from 4bcm/a in 2020), 9bcm/a through Hungary and 4.3bcm/a through Slovakia. The capex for the construction of the pipeline through Bulgaria (474km) is estimated at USD 1.63bn, the paper reports. European operators have already booked 4.3bcm of gas in Slovakia, 3.8bcm in Austria in October for the supplies in 2022-2029. All booking procedures are supposed to be finalised by the March 2019.

The investment community is still evaluating Aeroflot’s new strategy which is to bring an 11% CAGR in passenger traffic over the next five years, we think. We also put an interesting analogy on the table: Air Canada. In 2013, the company launched its budget subsidiary, Air Canada Rouge, and we estimate that Rouge currently accounts for roughly 20% of Air Canada’s passenger traffic. Since 2013, Air Canada’s EBITDAR has grown 97%, or a 15% five-year CAGR, despite high oil prices during 2018. The EBITDAR margin increased from 12% to 18% over the same period.

The heads of the south division of X5’s convenience and supermarket formats have shared their estimate for the 2018-19 roll-out. Pyaterochka sees at least 450 openings this year and 400 next year, while Perekrestok anticipates increasing its footprint 30% YoY to 55 outlets in 2019F. The announced targets imply that the south region of Russia will account for 20% of the openings in our model, implying a significant focus on this area. Although the region is an emerging one for X5 and Pyaterochka, they are only going to have 11% of the store base there by YE19F and there is little clarity on the returns from these stores due to the strong competition from the key operators in the convenience format and the unorganised trade (including open markets at harvest time).

23 November 2018

5

vk.com/id446425943	Week Endnotes
Russia
Equities

X5 Retail Group – potential cooperation with China Post and parcel locker operators, of 20 November, by Maria Kolbina et al

Mail.ru Group – Citymobil closes first round of investments – Mail.ru Group’s share decreased to 17.65%, of 19 November, by Vladimir Bespalov et al

Retail – social commerce at RUB 591bn annually – 2% of total retail turnover – traditional chains face pressing need for digital strategy, of 23 November, by Maria Kolbina et al

Russian Utilities – Profiling Alexey Teksler, of 20 November, by Vladimir Sklyar et al

FSK – 2019 tariff indexation could outpace inflation – positive, of 20 November, by Vladimir Sklyar et al

Enel Russia – secures RUB 9.5bn of financing for wind farm project – neutral, of 23 November, by Vladimir Sklyar et al.

According to Interfax, X5 is in talks with China Post on alternative routes for goods from China, leveraging X5’s logistics platforms and in-store parcel lockers. In order to develop the latter, the retailer is rolling out a joint venture with Sovcombank. The greater focus on the e-commerce and digital growth pillars are upbeat for X5’s investment case. We see online trade increasing at a CAGR of 18% in 2018-22F to reach RUB 3.3tn and 8% of retail turnover. Traditional retailers are focusing on soon- to-become obsolete measures and have overlooked the chance to form alliances with IT companies, credit institutions and online retailers, which pose a competitive threat to them, in our view.

Citymobil, a Moscow-based ride-hailing service, has closed the first round of investments, according to Kommersant. Mail.ru Group’s stake in the service is around 18%, lower than was initially announced in April 2018 (26%). In April 2018, Mail.ru Group and MegaFon announced their intention to participate in the investment round of Citymobil. The total amount for the investment round was USD 35mn, with Mail.ru Group planning to invest up to USD 12mn for a share of up to 26% and MegaFon planning to invest approximately USD 14mn for up to 31%. The plan was to use the investments for developing the service (including geographical expansion). According to Kommersant, the investments from investors other than Mail.ru Group have increased and, thus, Mail.ru Group’s stake turned to be lower than was initially announced.

According to Data Insight and Yandex.Kassa, the social commerce market was RUB 591bn in the twelve months to March 2018. The average check was estimated at RUB 1,500, while 394mn transactions took place during the analysed period. Social commerce covers classified advertisement websites, social media, messengers, etc. The estimated turnover represents 2% of consolidated retail for the respective period and compares with RUB 1040bn of e-commerce in 2017. The most popular category within social commerce is apparel and footwear, representing 17% of the total, one third of all trades take places on classifieds. The emerging channel has 39mn buyers and 22mn sellers. The rapid development of e- and social commerce is a detrimental trend for traditional retail in Russia and yet it is, in our view, being overlooked by the sector.

After Vyacheslav Kravchenko, ex-Deputy Minister of Energy in charge of electricity, left his post, Minister of Energy Alexander Novak transferred the responsibilities for overseeing the electricity sector to Alexey Teksler, First Deputy Minister of Energy. In this report, we offer our readers some of his key previous statements as a readthrough on the future of the Russian utilities sector.

According to an Interfax report, the Federal Anti-Monopoly Agency has provided a draft of the tariff indexation for FSK for 2019. From 2H19, tariffs could increase 5.5%. Thus, in 1H19 the tariff could be RUB 173,164.15/MW-mo and RUB 182,688.17/MWmo in 2H19. We find the news positive for FSK since, despite the government having stated that the grid tariffs ceiling should be less than CPI, and the currently planned indexation in 2H19 is 3%, the FSK tariff indexation continues to outperform this barrier.

Eurasian Development Bank (EABR) has won the tender to provide RUB 9.5bn of project financing for the construction of a wind farm in the Rostov region, undertaken by Enel Russia. Enel Russia plans to commission the 90MW wind farm, consisting of 78 wind turbines, by 2020, with a projected cost of EUR 132mn. Securing project financing is a major milestone for the wind project and significantly lowers the risks of project delays. However, one concern we have about this news is the mismatch between the capacity bid, with which Enel Russia won this tender (commission 90MW at RUB 92,160/MW, or total capex of some RUB 8.3bn), and the size of the loan (already 15% higher than the originally envisioned capex) . It seems, taking into consideration the EUR-denominated price of the equipment and rouble weakness over the last 12 months, that the economics of this project might be under pressure.

23 November 2018

6

vk.com/id446425943	Week Endnotes
Russia
Equities

Real estate sector – Moscow housing bill at RUB 602bn in 2019-21F – acceleration in the renovation programme – but still limited impact on the commercial segment, of 19 November, by Maria Kolbina et al

Moscow sees its contribution to the housing programme at RUB 602bn in 2019-21. The renovation programme and development cover 62% of the funds. The budgeted funds envisage annual expenditures of RUB 125bn on the renovation programme, implying construction costs of some 2mn sqm of residential property, or 50% of the primary market volumes. The ultimate size of the programme to demolish obsolete housing is at least 16mn sqm, according to the estimates by city officials. We see 0.4mn sqm of estates under construction and the announced spending implies a sizable acceleration. We anticipate a gradual pick up in activities and still limited impact on the commercial segment in the medium term. Listed developers are likely to start benefiting from the improved supply of land plots in the next three years and could potentially see a greater offer from the city on the commercial segment in next five years.

23 November 2018

7