Romgaz - 2Q Results Beat Expectations

 

 

Romgaz - Earnings Revision

Recommendation: Accumulate (Neutral)

Price target (12m): RON 37.1 (prev. RON 32.6) 

Current share price: RON 33.1

 

Romgaz’s Q2/19 net income came to RON 434 mn (+37% YoY) on sales revenue of RON 1.16 bn (+17% YoY), beating market expectations. Sales were supported by higher domestic gas prices (the price cap of RON 68/MWh has been applied as of 1 May only for new contracts), higher amount of resold gas (4x YoY) and improved storage activity on tariff increases (+33% YoY), while revenue from electricity sales dropped by 92% on significantly lower volume sold.

 

EBITDA amounted to RON 599 nm in Q2/19 vs RON 460 mn in the same period a year ago (+30% YoY), primarily driven by an increase in natgas prices.

 

Cash and liquid financial assets amounted to RON 866 mn (RON 2.25 a share) at the end of March (representing ca. 7% of curr. mrk cap), 2019 compared to RON 1.45 bn at the end of last December. Cash decreased mainly because of dividend payments during H1/19.

 

Romgaz maintained its total revenue estimate for 2019 at RON 5.1 bn driven not only by higher gas production but also stronger commercial activity. Romgaz expects no significant change of the gas demand in Romania this year, but they estimate robust gas sales and a key market share for themselves. Romanian gas prices should remain relatively elevated compared to European gas price quotes due to strong domestic demand, increasing expensive imports and transportation costs.

 

We expect clean EBITDA to rise to RON 2.7 bn in 2019 from RON 2.1 bn in 2018. Although Romgaz maintains its profit target at RON 1.13 bn pre-tax profit for 2019, we think it is an overly conservative forecast. With H1 results being vastly better than what we had earlier expected we raise our pre-tax profit estimate from RON 1.38 bn to RON 1.94 bn for 2019 expecting that margin performance remains strong in the remainder of the year on higher storage tariffs and gas prices offsetting increasing costs due to adverse changes in regulation.

 

We also raise our net income forecast for 2019 from RON 1.28 bn to RON 1.64 bn as we anticipate a lower negative effect of the EO on earnings and higher domestic gas prices than previously.

 

Romgaz’s ambitious CapEx and acquisition goals will likely have an effect on its dividend pay-out ratio in the future. Romgaz has budgeted only a 50% pay-out ratio for 2019, the minimum rate based on which state-controlled companies are legally obliged to pay dividends in Romania. Therefore, we decided to err on the side of caution and cut our estimate for Romgaz’s pay-out ratio from 90% to ca. 60% for the coming years (on the basis of 50% of annual net income plus a third of expected excess cash on B/S), hence our new expectation that DPS growth should remain below reported EPS growth trajectory. We expect DPS to be RON 3.12 for 2019 and RON 2.83 for 2020 (vs. RON 1.96 and RON 1.99 expected previously), implying a DIVY of ca. 9% based on the current share price.

 

Romgaz is trading at an EV/clean LIFO EBITDA multiple, based on our 2019 earnings estimates, of 4.6x, which reflects a little bit lower valuation compared with its peers’ multiples.

 

Our sum-the-parts analysis shows a NAV of RON 37.5 per share for Romgaz, thereof upstream accounts for almost 75%. Cash and equivalent currently represents 6% of our NAV estimate.

 

We raise our 12-m TP, which is based on DCF approach, from RON 32.6 to RON 37.1 as a result of upward revisions to our earnings estimates for the coming years, and downgrade our rating on Romgaz from Neutral to Accumulate.

 

 

Attila Vago
Senior Analyst

CONCORDE SECURITIES LTD.

Hillside
55-61 Alkotás street, H-1123 Budapest.
Phone:  | Fax: | Mobile:
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MEMBER OF THE CONCORDE GROUP

 

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