The coronation is coming

1. We update our SOTP valuation for Fondul on the back of higher probability of Hidroelectrica IPO this year. Hidroelectrica (47% of Fondul’s NAV) could be valued at significantly higher valuation metric (ca. EV/EBITDA @ 12x.) if it comes to the market compared to its valuation in Fondul’s book (7.5x – 8x), in our view. As a result, we increase our TP to 2 RON / share leaving ca. 33% upside. Hidroelectrica stake itself could worth up to 1.2 RON/share in our view vs. the latest reported NAVPS of 0.76 RON / share. Meanwhile our best case scenario indicates a target price of RON 2.5 per share implying 18x EV/EBITDA valuation for the entire Hidroelectrica stake, which is still a 20% discount to its closest peer (Verbund).
2. Government’s participation in the IPO is essential, as the higher the free-float the higher the probability of MSCI Emerging Market inclusion in the near future (Hidroelectrica could easily become the largest market capitalization by far in the Romanian equity market, and free – float adjusted market cap could be EUR 2 billion @ 12x EV/EBITDA and assuming 25% free float a second largest in the Romanian equity market). Also if gov. participates in the first round (IPO), Fondul will be left with higher stake to sell later.