InterRAO - Trading Hit, Generation Resilient

InterRAO posted 1Q20 IFRS results that showed resilience. The main drag, as expected, came from trading, as the market conditions for the business were unprecedentedly weak. The ultimate impact of the current crisis cannot yet be estimated, so the company did not give any guidance on EBITDA, only saying that this year's results are likely to be weaker than last year's but that it hopes the deterioration will be mild. We believe that InterRAO's investment case is still intact and that the impact of the virus is unlikely to be game-changing. We therefore maintain a positive long-term view on the stock, though we do not see any major short-term triggers given the postponement of the strategy update to August or September and that there won't be any more details on the Vostok Oil project until at least 4Q20.> Bottom line boosted by FX gains on FX portion of cash pile. The 1Q20 results were close to our estimates, the main discrepancy being R9 bln in FX gains mainly attributable to the FX-denominated portion of the cash pile. The CFO said that the company took advantage of the ruble's depreciation and sold hard currency, and that now roughly 10% of the cash pile is FX-denominated. The cash pile grew to R286 bln, or roughly $4 bln at the current exchange rate.> Trading was the main drag... Both in y-o-y and Q-o-Q terms, the main drag on EBITDA was the trading business. Trading spreads in Finland and Lithuania were under significant pressure, which affected both volumes and margins. This was due to the unprecedented situation with power prices in the Nord Pool market, which was hit hard by the warm winter. This meant lower consumption and higher output from HPPs and wind farms. In March, the impact of quarantine measures on demand only added to the effect.> ... and the pressure is likely to persist. Even though 1Q20 was unprecedentedly weak for the trading business, the company is rather conservative in its full-year outlook. In all cases except the most optimistic one, InterRAO expects a roughly 50% y-o-y decrease in export volumes. Combined with the uncertainty over the recovery of prices in the Nord Pool region, this suggests that the trading business is likely to continue weighing on InterRAO's results throughout the year.> Generation more resilient. The y-o-y decrease in generation EBITDA was relatively mild (4.4%), and the margin for the segment even increased by2.3 pp y-o-y to 43%, as CSA capacity revenues, the main source of marginal income, were unaffected by weak electricity demand and prices were more or less stable.> No guidance articulated for 2020. The company did not provide any guidance for this year, indicating that it should have more clarity in June, when it has a better understanding of what impact the anti-virus measures had and better visibility on payment discipline (one of the most important areas of impact for the industry). The CFO indicated that the company expects the financial results this year to be worse than last year's, but the management hopes that the deterioration will be limited. Capex was guided at R32.7 bln including the VAT, which would mean a roughly 11% increase y-o-y.> Payment discipline in focus. The company indicated that payment discipline in the wholesale market is still at last year's level, meaning there has been no material impact YTD. In the retail market, there has been a deterioration in discipline, though the CFO refrained from providing an exact figure for the decrease in the collection rate. One interesting tidbit from the call was that InterRAO believes that the government decree forbidding retail companies from collecting penalties for late payments for the time being does not stop the penalties from accruing.> Strategy to be presented in August or September... The current plan is to wrap things up in August, though if two stages of approval are required, the strategy may not be ready until September. The CFO only indicated once again that the strategy update is unlikely to include any changes to the dividend policy.> ... while details on Vostok Oil will only be available in 4Q20. The strategy update now due in 3Q20 will not contain any details on the Vostok Oil project. InterRAO needs another 3-6 months to analyze the set-up of the capacities that could be required, and only after the technical details are worked out will it be ready to begin discussions with partners regarding financing for the project.> Investment case intact, but no short-term triggers. We believe that InterRAO's investment case is fully intact, as its flagship generation segment proved rather resilient. The segment has not been significantly affected by the decrease in electricity demand and is less exposed to payment discipline risks. Moreover, the company's cash pile increased to roughly $4 bln in 1Q20 (capex was down significantly, though it is expected to be up 11% for the full year), its bottom line was supported by FX gains and it has enough financial resources to weather the current crisis. We maintain a positive fundamental view on the stock, yet we note that there are not likely to be any triggers in the short term.