Russian Utilities - Following Interest Rate Trend
The shares of Russian power-generating companies (gencos) dropped 12% in ruble terms in 2021, underperforming the broader market by 27 pp amid an acceleration in inflation and rise in interest rates in Russia, which dimmed the dividend outlooks and the increased capex risks. Given the depressed current share prices, most of the stocks offer attractive returns. We expect to see investors become a bit more interested in the sector during the dividend season in June-July, but we do not anticipate a full recovery in sentiment until inflation and interest rates start to come down. We think this may happen at the end of this year. > Last year was strong. The sector enjoyed a recovery in demand for electricity (+5.5%) and favorable pricing in the first price zone (+16%). This supported the earnings of most generating companies, which should translate into higher dividends. After the weak share price performance in 2H21 and early this year amid rising interest rates, the sector average 2022E dividend yield has increased from 8.7% in mid-2021 to 10.8%.> This year will be more challenging. Electricity demand growth will slow, while spot market prices may not grow as much as last year and inflation will put upward pressure on capex. Companies with low leverage and a high share of CSA revenues (higher OFZ yields drive CSA tariffs higher) are better positioned in such an environment. Hence, we expect Unipro and OGK-2 to post the strongest earnings growth in 2022 (24-36%). > What names offer the highest dividend yields? The financial performance of companies in the following years will be driven mainly by CSA expiry schedules, the volume and timing of modernization, and renewables projects. These factors are therefore what will shape companies' earnings and dividend outlooks in the years to come. OGK-2 and Unipro (with fixed dividends) boast the highest dividend yields in the sector in 2022-24 (13-16%), before the expiry of their CSAs. Over 2025-30, RusHydro and Enel Russia (if it does not start new projects) offer the most attractive yields (12-14%). > Valuation. To value the gencos, given that dividends are a key component of the investment case we used the average of DCF- and DDM-based valuations. Based on this approach, RusHydro (with its solid LFCF and dividends after 2024) and InterRAO (which has the lowest multiples and could convert its huge cash pile into cash-generating assets, sparking a re-rating) have the highest upside potentials of about 40% and 60% to our target prices. We view these names as the best options for both liquidity-sensitive and long-term investors. OGK-2 (BUY), Unipro (upgraded to BUY on share price weakness) and TGK-1 (BUY) appear to be the most attractive options for medium-term dividend-oriented investors. Enel Russia and Mosenergo have respective upsides of 17% and 6% (HOLD ratings unchanged).PJSC Enel Russia is a wholesale generation company in Russia. Co.'s main areas of operation are production of power and heat, supply (sale) of power and heat, receipt (purchase) of power and heat from the wholesale power (capacity) market. Co. is active in four production branches around Russia: in the Ural region - Reftinskaya GRES, Sredneuralskaya GRES, in the northern Caucasus - Nevinnomysskaya GRES, and in Central Russia - Konakovskaya GRES. Co.'s aggregate installed capacity is 9,677 MW for power and 2,382 GCal/h for heat. Co. provides power and heat to both industrial enterprises and household consumers via local power distribution networks.
PJSC RusHydro is a hydro-generating company based in Russia. Co. is engaged in the generation and sale of electricity and capacity on the Russian wholesale and retail markets, as well as generation and sale of heat energy. The main activity of Co. is production of power from renewable energy sources, developing power generation using water flows, tidal, wind and geothermal energy. It has an installed electricity generation capacity of 38.5 GW; and heat capacity of 16.2 GCal/h.
Inter RAO UES PJSC is a functioning operator of electricity exports and imports in the territory of Russia. Co. represents the interests of two Russian power sector participants: RAO UES of Russia and Rosenergoatom concern, which possess 60 and 40% of the shares respectively. Co. is engaged in arranging transboundary electricity supplies, to provide both domestic and foreign consumers with electric power. Co. is also engaged in pursuing effective investment activities. Co. is developing several areas of activity, including: electric power export and import supplies; electricity sales in home and foreign markets; investment activities; and foreign asset management.
Mosenergo is a regional energy company primarily involved in generation of heat and electric power and heat distribution services in the Moscow city and Moscow region. Co.'s portfolio includes 15 power plants with the electric installed capacity of 11.9 thousand MW and heat installed capacity of 40.5 thousand MW (34.9 thousand Gcal/hour). Co. produces 6% of the electricity generated in the Russian Federation (exclusive of nuclear power plants) and is a main supplier of electricity and heat for the Moscow region. Co. supplies 67% of the total electricity consumption of Moscow region.
OGK-2 JSC is primarily engaged in the generation and sale of electric and heat power. Co. consists of the following power stations (plants): Troitskaya GRES, Stavropolskaya GRES, Pskovskaya GRES, Serovskaya GRES, Surgutskaya GRES-1, Kirishkaya GRES, Ryazanskaya GRES, Novochercasskaya GRES, Krasnoyarskaya GRES-2, and Cherepovetskaya GRES.
Territorial Generating Company - 1 is a producer of electricity and heat energy in the North-West region of Russia. Co. incorporates generating enterprises from the Baltic Sea to the Barents Sea. Generated electricity is delivered to the domestic wholesale market of electricity and capacity as well as exported to Finland and Norway. Co. is a strategic supplier of heat energy in Saint Petersburg, Petrozavodsk, Murmansk, Kirovsk in the Leningrad Oblast, and Apatity in the Murmansk Oblast.
E.ON Russia is engaged in the wholesale electricity market, it produces and sells electric and heat power. As of Dec. 31, 2012, the structure of Co. includes five heat power plants with the total installed capacity of 10,345 MW/2,125.9 Gcal/h: Surgutskaya GRES-2 (Khanty-Mansi Autonomous Area, Tyumen Region), Berezovskaya GRES (Krasnoyarsk Territory), Shaturskaya GRES (Moscow Region), Smolenskaya GRES (Smolensk Region) and Yaivinskaya GRES (Perm Territory).
Sberbank CIB Investment Research is a research firm offering equity, fixed income, economics, and strategy research. It covers analysis on all aspects of Russia’s capital markets, issues and industries. The firm analyzes trends in Russia and combines local knowledge with a global perspective. It processes macroeconomic data, market and company-specific news, stock quotes and other information for providing research reports. The firm provides details and latest prices on the most traded names and most traded paper on all segments Russian market. In strategy research, it provides thematic research, tips and descriptions of the methodology used to evaluate companies.
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