LUKoil confirmed at BUY, TP RUB 8,100 - Strong FCF translates into double digit dividend yields

The main positive change in the new dividend policy is that now LUKoil will distribute 100% of its generated free cash flow through both dividends and buybacks, while under the previous 50/50 strategy LUKoil was only paying out 60-65%. Moreover, LUKoil will focus on dividend payments rather than buybacks, so shareholders themselves will have the full decision on reinvestments. According to our estimates, buybacks will account for only 5-6% of free cash flow distribution, while in 2019e buybacks were over 40% of total payouts. Based on our projections, the new divided policy of LUKoil implies a double-digit yield of 12% (incl. buyback) as of next year. Thus, investors buying the stock at the current market could benefit from higher interim dividends. LUKoil proposes a final dividend for 2019e of RUB 263 plus an interim dividend of RUB 314, which implies a dividend close to 9%, above the market average. More importantly, LUKoil has also generated one of the highest free cash flow yields, which fully covers dividend payments. Besides, according to our estimates, the tax breaks should add USD 0.7 bn to the EBITDA of the company by 2021e. However, total 2020e results (EBITDA and FCF) are likely to be slightly lower vs 2019e as LUKoil had strong one-off incomes in 2-3Q 19. We confirm our BUY recommendation for DRs and local shares and raise our DCF-based target prices to USD133 (from USD102) and RUB8,100 (from RUB 6,550), respectively, triggered by the revised financial results, which were supported by additional flows of crude oil with tax breaks and strong 9M 19 results.