Inter RAO confirmed at BUY, TP RUB 7.6 - New year of big hopes pinned on new strategy

We confirm our BUY recommendation and increase our TP to RUB 7.6 from RUB 5, incorporating lower risk-free rates and all of the non-priced in cash pile in our DCF valuation (currently around 30% of Market Cap to reach 50% by end-20e) ahead of the approaching Strategy Day in May. The latter could finally reveal new value-accretive M&A opportunities, which could be funded by the cash valued by the market at zero and trigger the stock up. For instance, the use of cash on the possible purchase of Unipro (a possibility that was not ruled out by the management at the Investor Day last December) at the current market price could add 25% (RUB 180 bn) to Inter RAOs market cap, while the Kaliningrad power plants could add 15% (up to RUB 100 bn) if purchased. The fate of the Kaliningrad assets should be decided by the government, Rosneftegas and Inter RAO after all the stations are completed (by end-2020e). Interestingly, even after the January rally (by over 15%), the stock still seems one of the cheapest at 2.2x EV/EBITDA 20e even without the quasi-treasury stake vs the Russian 4.7x EV/EBITDA average which leaves opportunities for cash pile repricing alone. On another note, we exclude the treasury stake in the valuation as we see no use for it now since it is neither planned for cancellation nor is there a strategic partnership on the horizon to use it for.