Fondul Proprietatea - Decent NAVPS Development And Updated Distribution Policy With More Potential To Create Shareholder Value

Fondul Proprietatea - Instant Earnings Comment

Recommendation:  Buy

Target price (12M): RON 1.05

 

 

 

Decent NAVPS development and updated distribution policy with more potential to create shareholder value

 

Fondul released its first quarter results and April’s NAV report.

 

Summary: The most important take-away for investors in our view is the updated distribution policy which allows Fund Manager to change the mix of cash distribution from dividend to buyback in case of exceptional market environment. The total amount of cash distribution remains intact but the mix could change. We believe this could add more flexibility to the Fund manager to create value for shareholders thus we think it is positive. (Please find our arguments later in the report). As for the financial figures, April’s NAVPS came to RON 1.35 from which DPS (0.09 per share) was excluded, NAVPS in March stood at RON 1.43.

 

Fondul Ex-Div NAVPS for April has arrived to RON per share 1.3527 (-4.6% M-o-M), adding back the 0.09 DPS it would have been 2% higher on a monthly basis. Regarding the assets in the portfolio, the unlisted part remained broadly unchanged – Hidroelectrica got a valuation update in January and its valuation increased by 2% but it was known – as for the listed portfolio, Fondul gained ca. RON 392 million  (ca. 0.055  RON per share) in Q1.

 

During the quarter Fondul sold 4.3 million BRD (ca. RON 55 million; avg price of RON 12.8 per share). Apart from that liquid assets increased mainly because of the collected interim dividends and special dividends from portfolio companies (RON 172 million) pushing cash and equivalents to RON 461 million (ca. 0.07 per share). Year to Date, Fondul bought back 121million shares (ca. 16% of the tenth buy-back program) at an average price of 0.89 RON per share (avg. of 7% discount to current share price).

 

In our latest research we drew investors’ attention to the widened discount between share price and net asset value per share which has nicely narrowed since as the tension eased regarding the Emergency Ordinance in Romanian equity market So far, Fondul has reached 1yr heights (0.977 RON per share), and share price to NAVPS discount has narrowed from 42% to 32% based on the latest available report.

 

Share price vs. NAVPS

Source: Concorde, Fondul

 

 

NEWS:

• Hidroelectrica’s (41% of NAV) financial performance in Q1 was better compared to last year’s same period. EBITDA rose by ca. 3% to RON 720 million, despite the significantly lower volume (-22% y-o-y) which was more than offset by the higher prices. Additionally we would like to note that from March Hidroelectrica is subjected to sell certain amount of electricity on the regulated market (1.64 TWh ca. 10% of last year’s produced volume at 112 RON/MWh ca. 30 - 40% discount to Romanian baseload power price), thus financial figures from now on will be under pressure.

 

• Aeroporturi Bucuresti’s (9% of NAV) passanger traffic continued to increase at high single digit pace in Q1.

 

• ENEL distribution companies (12% of NAV) In the Q1 report Fondul implicitly mentioned that a after the negative revelation of regulated asset triggered by the drop in RRR (ca. 200 bps) from 7.7% to 5.66% for 2019-2023, was subsequently increased to 6.9% (equivalent of 80 bps drop only from 7.7%) thus investors could expect a valuation upgrade based on only a 80 bps drop rather than 200bps. In the back of the envelope it would translates to ca. RON 120 million (0.0168 RON / share) positive revaluation.

 

• Change in distribution policy: Fondul updated the annual cash distribution policy in which under exceptional market condition the Fund Manager may propose a change of the mix of cash distribution and share buyback to allocate more of the distributable cash towards buyback, if it considers this to be in the best interest of the shareholders to enhance shareholder value. At first glance we deem it positive, as this supports share price stability and may create value through purchasing shares with large discounts. Retrospectively, it would have been a value creative tool during the latest turbulence in the Romanian equity market. As we can see in the chart below, in December investors overreacted the situation and widened the share price to NAVPS. We believe that kind of environment prompted this new solution and investors may acknowledge that if similar market environment occurs the Fund Manager will reallocate cash from the pocket of dividend to share buyback.

 

The new cash distribution policy would have been useful during the last market turbulance

Source: Concorde, Fondul

 

Dividend: Fondul will pay 0.09 DPS for 2019, implying 9.5% dividend yield. Ex-div date is 7^th June.

 

• Recommendation: We like the change in the distribution policy as it supports a more stable share price and at the same time create additional possibility for shareholder value creation which could have been a useful tool during the end of the last year. In light of the decent development of the portfolio we reiterate our BUY recommendation and Target Price for Fondul.

 

 

Gellert Gaál
Equity analyst

CONCORDE SECURITIES LTD.

Alkotás Point
50 Alkotás street, H-1123 Budapest.
Phone:
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MEMBER OF THE CONCORDE GROUP

 

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