Enel Russia - Sacrificing Dividends in 2021

Enel Russia presented its 2021-23 strategy yesterday. The company has decided not to pay dividends in 2021 and to reallocate the R3 bln in dividends previously guided to be paid this year to 2023 (in addition to 65% of 2022 net income). It also announced an upward revision to capex guidance and more details on the launch of two wind farms, Azov and Cola, both of which will be delayed. Having taken account of these major changes, we have updated our valuation model. We downgrade the stock to HOLD, with a R0.97 per share 12-month target price.> A sector outlier. With its decision to forgo dividends in 2021, Enel Russia currently screens as a sector outlier. Given that other Russian utilities still offer quite robust dividends, the decision has already resulted in a substantial market reaction. Though one could argue that Enel Russia is in a different stage of its investment cycle than other utilities companies with its huge outlay on wind farms, this should have been evident to the management when they provided the previous dividend guidance (a fixed dividend payout of R0.0848 per share for 2020-22).> Wind farms delayed. The new strategic plan shows the Azov wind farm being launched in late May 2021 and the Kola wind farm in late April 2022. We have adjusted our model to reflect the later commissioning of these units. We estimate that the delays will cost Enel Russia R2.1 bln in EBITDA, while the company may also have to pay fines if it is unable to get them canceled.> Higher capex than we previously expected. With the new capex guidance for 2021-23, we had to raise our capex assumptions for the period by more than 25%. The company attributed the revision to the postponement of capex from 2020 to later periods and FX effects. The latter could be mitigated by hedging instruments going forward. > Limited capacity for new investment. Though Enel Russia plans to consider new renewables projects and is looking into localized gas turbine tenders in Russia, the investment capacity of the company is currently limited given that it expects net debt/EBITDA to be around 3.4 at the end of 2023. We believe this could mean that the parent company Enel Group would need to get involved if any lucrative projects appear in the Russian market. Enel Russia could also sell some of its gas assets or do an SPO to finance incremental capex.> Downgraded to HOLD. We downgrade Enel Russia to HOLD with a R0.97 per share 12-month DCF-based target price.