Fondul Proprietatea - Electricity price cap’s tooth is not that sharp - Instant Earnings Comment from Concorde Ltd. (Hungary)

Fondul Proprietatea - Instant Earnings Comment

Recommendation:  Buy

Target price (12M): RON 1.05

 

 

Electricity price cap’s tooth is not that sharp

 

Fondul released its annual report and monthly NAV report.

 

Summary: The most important take-away for investors in our view is the negative of Hidroelectrica from December to January, which became less severe than we had initially assumed (RON 400 million vs. our estimation of RON 700 million). Due to the introduction of electricity price cap by regulator, Hidroelectrica’ s NAV in Fondul’s portfolio has decreased by ca. 10% to RON 3,884 million still significantly above after the Decembers’ revaluation.

 

The drop in value implies a total decrease in value of Hidroelectrica of  ca. RON 2 billion (RON 391 / 20%) which should be the result of fall in free cash flow or the loss in revenue during the 2 years in which the electricity price cap remains in effect. This implies ca. 65% of the  generated electricity that would be subjected to regulated market and to the price cap, assuming that the level of price cap would be at Hidro’s production cost  (RON/ MWh 120), on our calculation. Thus basically they priced the worst case scenario.

 

All in all, Fondul NAVPS has arrived to RON 1.369 in January a little decline from end year NAVPS of 1.4095 (-4%). 

 

Additionally, Fondul disclosed the amount of special dividend they have received from SOEs which mounts to ca. 0.032 per share, mainly from Hidroelectrica. We would like to highlight that further proceeds could be expected as government wants to collect ca. 35% of surplus cash in SOE’s which may add further 0.02 per share (only from Hidroelectrica).

 

Disposals: There was no additional disposals in the last quarter.

 

Fondul has announced 0.09 DPS for 2019, implying 10.3% dividend yield.