Russian Utilities - Corona Doesn't Corrode Fundamentals
Utilities are the Russian market's top performer YTD and, we argue, well positioned for when the risk-off clouds pass. Of course, the recent risk-off turn means a bout of profit taking is likely. In fact, utilities may temporarily sell off more sharply than others. However, any underperformance would not necessarily stem from specific coronavirus-related risks - the sector is certainly not on the front lines - but would rather be due to having posted such strong gains YTD. We believe the sector's fundamentals remain quite solid and that the main investment cases remain intact. Moreover, as greater quantities of local money begin to enter the stock market, and given that retail investors pay more attention to utilities, the sector should be poised to recover nicely. We make no changes to our recommendations for the sector, but adjust our target prices after updating our model.> Utilities on a tear to start the year. Utilities have added more than 10% YTD in terms of total return in dollars, which makes the sector the top performer in the Russian market (the broad MOEX Index is down 6.3% over the same period). Gazprom's decision to impose a 50% payout on the power generation subsidiaries of Gazprom Energoholding has provided a major tailwind for the sector in general and, in our view, pushed investors to take another look at the strong balance sheets and healthy free cash flow of utilities names.> YTD gains rather than specific coronavirus risks could mean heavier profit taking... The sector does not have any direct exposure to coronavirus-related risks. But if risk sentiment remains sour, the sector's market-leading YTD performance makes it ripe for further profit taking. > ... yet fundamentals are solid. We believe that the undemanding multiples and healthy dividend yields, secured by robust leveraged free cash flow yields, remain in place. The average leveraged FCF yield excluding one-offs is well above 10%, while the dividend yield is 7.7% this year and should rise to 9.2% in 2022.> Local flows could ease the recovery. A recent phenomenon in the Russian market is the rise of the retail investor. While still in its nascent stages, the trend is expected only to pick up steam. Retail investors show disproportionately more interest in utilities than the sector's weight in the main indexes, which means that local inflows could help the sector recover more quickly - and smooth out volatility - once the coronavirus-driven selloff finally fades.> Individual stock preferences. We still prefer as our top picks the names that combine inexpensive multiples, healthy free cash flow and potential upside in terms of dividend payments. These are InterRAO, OGK-2 and TGK-1. Meanwhile, we think that if risk sentiment remains dampened for longer, names with fixed dividends (Unipro and to a lesser extent Enel Russia) should be more resilient.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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