Fondul Proprietatea - Hidroelectrica Will Be In The Spotlight Again

Fondul Proprietatea - Instant Earnings Comment

Recommendation:  Buy

Target price (12M): Under revision (previously: RON 1.05)

 

       Hidroelectrica will be in the spotlight again

 

Fondul released its H1 result and July’s NAV report.

 

Summary: There was no significant surprise in these reports as we received the asset revaluations in the June monthly NAV report, since then, there has not been any change. NAV of July arrived to 1.54 RON/share from 1.51 RON/share a 2% M-o-M increase. Please note that the NAV calculation even in June has already excluded the dividend outflow, including that, June NAV would have been 1.6 RON/share. This means that share price discount to NAVPS is standing at average level 29% vs. 3yr median of 30%.

As for Hidroelectrica, the fact that government again wants to list the company and that there is a potential that Hidroelectrica may utilize the idle cash on its balance sheet confirm our positive view on Fondul and also our recommendation.

 

Given the share price reached our price target we reassess our target price but keep the recommendation at BUY. 

 

During this quarter Fondul continued to sell its BRD stake, and managed to divest entirely from the romanian bank (RON 201 million). With the divestment, listed ratio declined to 25%, which is important in light of the Fund’s Investment Policy, the Fund cannot actively decrease the listed part of the portfolio under 20% of the NAV.  In June, the valuation of 8 unlisted holdings were updated resulted in an increase of RON 426 million in value ca. 5% compared to May values.

 

Annual dividend excluding special has mounted to RON 674 million 18% y-o-y increase a record high level.

 

 

NEWS:

• Hidroelectrica’s (38% of NAV) financial performance in H1 was better compared to last year’s same period. EBITDA rose by ca. 20% to RON 1748 million, however profit declined by 8% Y-o-Y due to additional profit tax obligation the company incurred mainly due to the fact that it utilised RON 1,574.2 million of previously untaxed realised revaluation reserves to cover the value adjustments of the historical complex investments.

During the first six months of the year the total energy sold out of own production was 8.95 TWh, down comparedto 9.08 TWh during H1 2018, while total energy sold reached 9.62 TWh, up from 9.49 TWh during H1 2018.

 

Also government has been vocal about its renewed intention to list the company. As a result Hidroelectrica launched the process of hiring a financial consultant to assist the company in the listing procedure. Also,Hidroelectrica mentioned that it is interested in certain assets of which CEZ plans to dispose. CEZ owns distribution, supply and the largest onshore wind farm in Europe, at Fântânele, Cogealac and Giardina, with a total installed power of 600 MW. We are in a view that the latter would be a perfect match for Hidroelectrica given its upstream knowledge, and would fit Hidroelectrica’s CO2 free generation assets.

 

We are in a view that it would be positive for Fondul if Hidroelectrica would utilize its idle cash, and acquire one of CEZ’s assets,. In our calculation, Hidroelectrica had ca. RON 2.5 billion cash in the beginning of the year, while the total equity value for the whole operation of CEZ (three segments), assuming no debt would cost ca. RON 4 billion. Although we do not expect that Hidroelectrica would acquire all of CEZ’s operation, in our view Hidroelectrica would need further RON 1.5 billion debt that would lead to a more optimal capital structure.

 

Back of the envelope calculation for CEZ’s Romanian assets

Source: Fondul, CEZ, Concorde

 

On the IPO side, we have been vocal that it would be fantastic, as (I) the share price discount due to the large unlisted part of the portfolio would fall as the largest unlisted part of the portfolio becomes listed; (II) it would immediately trigger 15% increase in Hidroelectrica’s NAV since auditor applies 15% discount for the lack of marketability.

 

We haven’t noticed heightened interest for Fondul because of the renewed interest of IPO form government or potential the acquisition of CEZ assets as Fondul trades at 0.7x P/ NAVPS at its average level.

 

• Aeroporturi Bucuresti’s (9% of NAV) passenger traffic continued to increase at high single digit pace in Q1 (+9% y-o-y).

 

Recommendation: Since the development is broadly in line with our assumptions we reiterate our recommendation but reassess our target price.

 

 

 

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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