Russian Utilities/Transport - Opening Short-Term Pair-Trade Idea

We open a short-term pair-trade idea, expecting Unipro to remain more resilient to the ongoing market volatility than Globaltrans. For Globaltrans, the combination of excess capacity in the gondola market, the economic shocks from coronavirus measures and their longer-term impact on the global and Russian economies could cause the company to reconsider its dividend guidance. And as for Unipro, we believe that its non-cyclical business is better protected against economic shocks, and the fixed dividends for 2020-22 still appear feasible.> Key drivers and catalysts. Given the extreme volatility in markets, we believe resilience to economic shocks is currently a very supportive factor.Unipro has negative net debt, while its dividend policy sets a fixed DPS of R0.317, meaning a 13.1% yield for 2020-22. Moreover, the dividend stream is driven mainly by capacity payments for Berezovskaya Unit 3, which are not affected by changes in electricity consumption and will only decrease if the company fails to have the unit up and running or if regulations are changed. Only 22% of Unipro's gross margin comes from the electricity market and is therefore subject to potential price and volume declines.For Globaltrans, the excess capacity in the gondola market continues to pressure spot lease rates, which are now around R1,100/railcar/day, down more than 40% from the peak in early 2019. The industry, which is already in excess-capacity mode, is far more vulnerable to economic shocks, at least compared with utilities. The company previously guided for two dividend tranches of R8.3 bln each (for 2H19 and 1H20), for a total DPS of $1.15 per GDR, which translates into a 22% yield for dividends to be received through this September. Even if Globaltrans sticks to this guidance on March 30, when it presents its 2019 results, we believe that the risks that it would then stop distributing special dividends starting in 2H20 have increased substantially. Even if spot lease rates stay where they are, the company's LFCF could be roughly R10 bln this year, while its net debt/EBITDA could climb to around 1.0 by the end of this year.> Performance and what's in the price. Unipro is down 33% in dollar terms YTD, while Globaltrans has lost 43%.> Risks to our view. For Unipro, a sharp economic downturn could force the government to revise its regulatory approach toward utility companies, and capacity payments in particular could be at risk. A limited impact of measures to fight the spread of Covid-19 on the Russian economy and accelerated infrastructure projects could be upside risks to our view on Globaltrans.