Enel Russia - Modest Fixed Dividend Will Not Buoy Sentiment

Enel Russia presented its strategy update for 2020-22 yesterday at its capital markets day. In addition to providing the earnings outlook and areas of strategic focus, the company also presented its dividend guidance for the period: it guides paying a fixed dividend of just R0.0848 per share per year in 2020-2022, for a dividend yield of 8.3%. The capex guidance was above our previous estimates, although this will be compensated for by the fact that the company plans to sell a mothballed power train in 2021. We believe that the fundamental value of Enel Russia remains more or less the same and is not affected by the dividend decision, as we think the company simply chose to limit dividends to be prepared for additional capex in the renewables segment. Yet, because the upside is limited and we see no material short-term drivers, we downgrade the stock to HOLD.> Fixed dividend this year and in the next two years... Enel Russia intends to pay R3 bln in dividends per year in 2020, 2021 and 2022. This means a DPS of R0.0848 and an 8.3% yield. With many names in the utilities sector taking steps toward higher shareholder remuneration, such a dividend yield may decrease volatility in the stock but is unlikely to be a short-term re-rating driver.> ... is de facto covered by the Reftinskaya TPP sale proceeds.... Enel Russia has already repaid R12 bln of debt using proceeds from the sale of Reftinskaya TPP. The difference between the total expected proceeds from the sale of Reftinskaya and the funds already directed toward deleveraging is R10 bln, while the guided dividends in 2020-22 total R9 bln.> ... meaning Enel Russia is getting ready for future wind or modernization tenders. Given that the dividends are about equal to the remaining proceeds from the Reftinskaya deal, as well as the fact that according to Enel Russia's own forecasts net debt/EBITDA in 2022 is expected to be 2.4, which does not seem to be a critical level for the company, we believe that the management decided not to offer the maximum possible dividend in order to be prepared for new modernization and renewables tenders.> Higher capex versus our previous estimates... The company's outlook for capex related to modernization came in above the figures we had in our model. We believe that this is because Enel Russia is planning for more modernization than what it indicated in its modernization tender application. For example, capex for the heating business was not mentioned in the application.> ... is partially offset by the expected sale of mothballed equipment. Enel Russia has a mothballed power train for a 440 MW CCGT, which it aims to sell in 2021. The carrying value of the power train is roughly R1.7 bln and the accumulated impairment related to the unit is R3.8 bln, meaning that the initial book value was R5.5 bln. We take 50% of the initial book value as a conservative estimate for the sale price, meaning that the company could get an additional R2.75 bln.> Stability in stock price likely, yet no major short-term drivers; downgrade to HOLD. We have slightly adjusted our target price from R1.20 per share to R1.22 after incorporating higher capex, the future monetization of the mothballed power train and updated macro assumptions. The dividend profile does not have a direct impact on our DCF-derived target price. In our view, although the fixed nature of the dividend for the next three years should make Enel Russia's shares less volatile, it will also preclude any major re-rating, especially given the lack of short-term triggers. We downgrade the stock to HOLD.