Transneft confirmed at BUY, TP RUB 200,000 - Nice dividends ahead, with even brighter prospects to come

We confirm our BUY recommendation for Transnefts preferreds, noting that based on media reports the tariff risks pressing down the stock are likely off the table and so is the risk of further dividend postponement. All in all, despite the OPEC+ deal effect on oil transportation (to be cut by ca. 10% this year), excluding WC changes, the company should still offer a double-digit FCF yield (10% in 20e, close to last years 11%) propped up by both indexation (with the effect multiplied by >50% EBITDA margins) and capex cuts (given no new projects) and provide a nice 8% DY for 2019 (RUB11,612/share with the record date on Oct 20) vs. the 5.7% Russian average. Incl. 2019-2020e dividends, the next 12-month DY could be over 15% combined. Furthermore, once transportation recovers, FCF yield in 2022e could be almost 15%. We do not consider any recent non-cash write-offs a risk to the dividend base and even see a potential for linking dividends to normalised FCF in the future, which could protect the company from any further tariff cut suggestions and be beneficial to both the state and minority shareholders. Overall, given the immense potential for both FCF and dividend growth we keep the stock on BUY, although we slightly cut our TP for preferreds on the back of lower 2020e transportation projections to RUB 200,000 from RUB 215,000, keeping our 25% discount for preferreds vs ordinaries.