Fondul Proprietatea - Still Has Upside – Remains BUY

Fondul Proprietatea - Instant Earnings Comment

Recommendation:  Buy

Target price (12M): RON 1.42 (previously: RON 1.05)

 

Still has upside – remains BUY

 

Fondul released its Q3 results and October’s NAV report.

 

Summary: There was no significant surprise in these reports as we received the NAVPS report in the beginning of October, since then, there has not been any significant change. NAV of October arrived to 1.558 RON/share from 1.557 RON/share a little increase on a monthly basis.

 

Additionally, we increase our TP as share price reached our former TP and we still see substantial upside in Fondul.

 

Fondul has received significantly more dividend in 2019 9M reaching RON 723m (0.105 per share) (+27% y-o-y) compared to last year same period, thanks to the large special interim dividends, which should continue next year as well, in our view as Romanian government ‘s budget deficit is forecast to widen from -3.6% to -4.4% according to European Commission. Moreover, Hidroelectrica is still sitting on a pile of cash (ca. RON 2.5 bn in the end of 2018 equivalent of 0.07 RON per Fondul’s share in our calculation) so there is capacity to pay, assuming that Ministry of Energy will block any potential acquisition.  Also, Fondul requested special dividends from Hidroelectrica, Nuclearelectrica and Bucharest Airport in a total amount of RON 314 million (ca. 0.05 DPS) which will be decided in GSM until 17 December 2019.

 

Listed equites continued to perform well adding ca. RON 1.3 bn valuation gain in 9 months. Administration fees declined slightly to RON 56 million from RON 67 million, leading to RON 1.9 billion net profit.

 

Price to Net asset value per share is hovering around 25% bit below the 30% 3 year average, which may imply that investors speculate for higher DPS from Fondul as the fund received special dividends or, expect divestments from the listed part of the portfolio. (Please see the historical share price vs. NAVPS developments below).

 

Monthly share price & NAVPS developments

Source: Concorde estimation, Fondul

 

 

Fondul declared its 11^th share buyback program that will start from 1 Jan 2020, and will purchase back ca. 800 million shares +6% compared to last years (ca. 10.5% of the outstanding shares).

 

Share buy-back programs

Source: Fondul

 

Earning Revision: Since share price reached our target price of 1.05 RON/share we have updated our SOTP model and target price for Fondul. We still believe that Fondul has hidden gems in its portfolio (Hidroelectrica, Bucharest Airport, ENEL) which valuations include 15% discount purely due to the fact that those companies are unlisted but it may change in the upcoming years, in our view. Considering that, FP has to divest from the unlisted portion of the FUND, price to net asset value per share discount should decrease as well. Although we do not expect the listing of Hidroelectrica until 2021, investors could receive handsome 9-10% dividend yield - at current share price, on our calculation - until one of the catalysts materializes (ENEL divestment, Hidroelectrica IPO, opportunistic sale of the portfolio companies etc.). Also, since large part of the companies in the portfolio who pay decent dividends (Hidroelectrica and OMV Petrom) receive its revenue in hard currency – (ca. 75% in USD/EUR), thus consequently FP has a natural FX hedge, protecting investors from RON deprecation.

 

All in all, we reaffirm our BUY recommendation with an increased our 12months ex-div target price to 1.42 RON per share representing a 20% upside. – Please see our Sum Of The Parts model and Hidroelectrica’s DCF model in the PDF.

 

SOTP model

NOTE: Current price to NAVPS discount reflect the large portion of the unlisted companies in the portfolio, however this should decrease if the divestments from that portion continues, in our view. That was the reason why we applied lower than avg. Discount rate (25% vs. 30% 3yr median) to highlight that angle of the equity story.  

 

Source: Concorde estimation, Fondul

 

We differ from Fondul’s NAVPS in that we expect (EUR/MWh 50 power price) thus higher valuation on Hidroelectrica (still valued at 7.2X EV/EBITDA on our calculation vs. Verbund 13x for 2019), and OMV Petrom, where we have a 0.58 RON per share 12months ex-div. target price.

 

Gellert Gaál
Senior equity analyst

CONCORDE SECURITIES LTD.

HILLSIDE  
55 – 61  Alkotás street, H-1123 Budapest.
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