Romgaz - Fairly Priced After Relaxation In Fiscal (EO) Measures

 

 

Romgaz - Earnings Revision

Recommendation: Neutral (Accumulate)

Price target (12m): RON 32.6 (prev. RON 30.0) 

Current share price: RON 34.0

 

Romgaz’s Q1/19 net income came in at RON 542 mn (+16% YoY) on sales revenue of RON 1.71 bn (+16% YoY). Sales were supported by own gas production and higher amount of resold gas, while revenue from electricity sales and storage activity dropped by 17% and 28%, respectively. EBITDA amounted to RON 894 nm vs RON 706 mn in the same period a year ago, primarily driven by an increase in natgas production.

 

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. The joint venture with Schlumberger ended at the end of 2018 but gas production on the respective field remains in the portfolio of Romgaz and the entire production will be considered as own production in the future. the source of gas for the new CCGT power plant can also be from import depending on market conditions and prices for both the gas and the electricity.

 

As a result, Romgaz anticipates RON 1.13 bn pre-tax profit for 2019 that we think is a bit conservative. Our pre-tax profit estimate is RON 1.38 bn for 2019 expecting strong margin performance continuing in the remainder of the year (e.g. higher storage tariffs has already come in force) despite headwinds on both top and cost lines due to adverse changes in regulation.

 

Romgaz earlier warned that both its turnover and profitability might fall by 20-25% in 2019 due to the Emergency Ordinance (EO). The company earlier expected the EO to put a drag on the realized profit to the tune of around RON 400 mn but since then the EO has been amended at the end of March, 2019 in a favourable way, meaning that earnings are likely to be less impacted by the EO than previously thought. We anticipate a negative effect of the EO of around RON 200 mn, or ca. 10% on Petrom’s clean CCS-based EBITDA in each year between 2019 and 2021, if other things remain unchanged.

 

As a result, we expect clean EBITDA to remain by and large flat at around RON 2.1-2.2 bn in 2019 and 2020, respectively. However, due to impairments on exploration we lowered our reported net income forecasts from RON 1.41 to RON at RON 1.18 bn for 2019. At the same time we raised our net income forecast for 2020 from RON 1.16 bn to RON 1.28 bn as we anticipate a lower negative effect of the EO on earnings than previously.

 

The CapEx plan has also remained unchanged at RON 1.38 bn for 2019, implying investment spending ramping up as the year progresses. We expect somewhat lower CapEx than budgeted as evidence shows that investments has finally never been as much as scheduled for a given year. Romgaz expects the commissioning of Iernut new power plant by the end of Q1 2020 with a minimum utilization rate of 54% (very low estimate), while it is considering a new project for a 400 MW power plant in Deva as well, where the investment will be about EUR 300 mn.

 

Asie the plans to produce more electricity Romgaz is about to take over a chemical fertilizer factory from Interagro on the account for old debt with products that already have a market. We note that Romgaz’s shareholders has recently approved the diversification of Romgaz’s products and activities allowing for expanding further along the value chain towards petrochemicals that provides a much higher added value for the gas Romgaz extracts. That idea makes sense in our opinion, with the domestic gas market likely to have surplus after the exploitation of Black Sea gas resources, so the solution to this expected surplus can be, on the one hand, new gas power plants and, on the other hand, using them as feedstock for petrochemicals production.

 

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 1.96 for 2019 and RON 1.99 for 2020, implying a DIVY of 5.8% based on the current share price.

 

Although we raise our 12-m TP, which is based on DCF approach, from RON 30.7 to RON 32.6 as a result of upward revisions to our earnings estimates for the coming years after the government relaxed on the EO, we think the stock is fairly prices at the current share price. Therefore, we downgrade our rating on Romgaz from Accumulate to Neutral.

 

Our sum-the-parts analysis shows a NAV of RON 33.6 per share for Romgaz, thereof upstream accounts for almost 70%. Cash and equivalent currently represents 7% of our NAV estimate.

 

Romgaz is trading at an EV/clean LIFO EBITDA multiple, based on our 2019 earnings estimates, of 6.2x, which reflects a little bit stretched valuation compared with its peers’ multiples.

 

 

Attila Vago
Senior Analyst

CONCORDE SECURITIES LTD.

Hillside
55-61 Alkotás street, H-1123 Budapest.
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MEMBER OF THE CONCORDE GROUP

 

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