Romgaz confirmed at BUY, TP RON 41 - Keep calm and carry on

The sentiment towards Romgaz decoupled from the overall positive market trend, especially after the publication of its 4Q 19 trading statement, which pointed to a drop in gas deliveries by 14% yoy, but also due to the weakness in international gas prices. However, we believe there was a bit of an overreaction, as Romgazs profitability does not have such a high correlation with volumes delivered or the level of international gas prices as one could assume. The taxation regime imposed by the Romanian state is both progressive, through the windfall tax, and linked to the declining international gas prices, through royalties. Romgazs upstream results do not grow directly correlated with gas prices, as the state takes 65% of the price difference above RON 47/MWh (EUR 9.8/MWh) and 80% of the price difference above RON 85/MWh (EUR 17.8/MWh). Royalties are paid using CEGH gas prices as a benchmark, whereas domestic gas prices for industrials had premiums to CEGH prices of more than 50% last year due to the impact of emergency ordinance 114. Moreover, the 2% tax on sales was abolished starting from January. Long story short, we believe that Romgazs upstream results could prove quite stable around RON 1.5-1.6 bn, even though we expect its average realized gas price to drop from RON 89/MWh in 2019e (including deliveries to households at RON 68/MWh) towards RON 77/MWh after the liberalization scheduled in July. In our view, upstream remains the bedrock which should ensure Romgazs status of a strong dividend play. We see Romgazs bottom line staying above RON 1.4 bn in the coming years, which would imply double-digit DYs even without special dividends. We confirm our BUY recommendation with a 12m cum-dividend target price of RON 41 (RON 39.5).