Surgutneftegas ord. cut to HOLD TP RUB 59, preferreds confirmed at BUY TP RUB 59 - Part of cash priced in, preferreds likely have lower downside

We downgrade both ordinary shares and DRs to HOLD from BUY due to the strong performance of the stocks, which left a minor upside to our upgraded target prices. Currently, we see that short-term deposits (USD 15 bn) are mostly priced in by the market. The market has not received any confirmation of rumours about the possible use of the cash pile. At the same time, in the beginning of 2019 the company was trading with a 30% discount to its peers on the EV/EBITDA multiple without taking into account its total deposits, while currently it trades even with a premium. Therefore, we believe that the investment in common shares may be subject to a high downside risk in case of complete refutation of the rumours. At the same time, preferred shares, the appreciation of which was significantly lower than ordinaries, offers an opportunity to play on the rumours with a less downside risk. The dividend policy of the company, which is fixed in the charter, implies a competitive dividend yield. Moreover, DPS on preferred shares cannot be lower than for ordinary shares. According to our assumption, for three years (2019e-2021e), Surgutneftegas could pay out RUB 10.4 per preferred share as a total dividend, yielding 28%. We have increased target prices for both ordinary and preferred shares up to RUB 59 from RUB 55 and for DRs to USD 9.6 from USD 8.7. We keep BUY recommendation for preferred shares.