PGNiG raised to BUY, TP PLN 4.50 - Looking at the full half of the glass

We have turned positive on PGNiG and upgraded the stock to BUY from HOLD with a new 12m target price of PLN 4.50 (PLN 5.0). PGNiGs share price has remained strongly correlated with European spot gas prices (see chart on page 4), although gas earnings account only for ca. 30% of the consolidated clean EBITDA with other large contributions coming from crude oil production (ca. 30%) and gas distribution (ca. 35%). Although PGNiG will most probably maintain its conservative dividend strategy (our 2019e DPS comes to PLN 0.12) due to high capex and potential M&As, we expect the company to improve its free cash flow generation from 2022e onwards (after expiry of the Yamal gas supply contract with Gazprom), when the gas trading business is expected to at least break even. Moreover, we forecast stronger gas prices in the long term on the back of higher global consumption (namely in Asia), but also a stronger focus on greener sources of energy in Europe. In a shorter-term perspective, we expect PGNiG to be compensated by Gazprom, estimating a one-off payment of between PLN 1.5-3.0 bn (implying an impact of PLN 0.26-0.52 per share), which we did not include in our projections.