PGE cut to HOLD, TP PLN 7.50 - Paving its way to a cleaner future

In this update we downgrade PGE to HOLD from BUY following a transfer of coverage of the Polish utilities sector. We set our new 12m target price at PLN 7.50, which implies a modest upside potential. PGEs recent share price rally was mainly driven by the market expectation that the domestic utilities sector could be restructured with a transfer of coal-based generation assets under the state umbrella, which would open access to cheaper financing to fund cleaner projects for domestic players. Despite the recently emerged expectations, which were supported by comments from government officials, we did not assume any changes for PGE at this time. We maintain our assumptions of a continuous unfair regulation of electricity prices for households and domestic premium coal prices. We reckon that higher inflows of electricity from neighbouring countries coupled with higher generation of renewables should keep PGEs margins under pressure. Also, we believe that it would be difficult for PGE and other Polish gencos to fully pass on the recent increase of CO2 prices, thus, facing additional pressure on margins. All in all, we project negative FCFs in 2020e, which should turn positive as of next year mainly as a result of capacity market payments.