Veles Capital - RusHydro: Waiting for the full-year results - Dec 18, 2018

RusHydro

Target: RUB 0.51, «HOLD»
Waiting for the full-year results

(To view the original document, please click on the link below:
http://reports.aiidatapro.com/brokers/VelesEN/EN_VC_HYDR_ DEC_18.pdf)

We confirm our target price of RusHydro at RUB 0.51 per share and keep the “HOLD” recommendation. We observe several non-recurring effects that might be responsible for the negative in the nearest coming up report and quotes dynamics.

The results and conference call
3Q 2018 results turned out to outperform our targets as the company received more funding within the reported period than we expected it to. Besides, outperforming our targets, the company’s sales grew 6.5% QoQ at the expense of rising output and growth of tariff for heating. Sales (including funding) grew 7.2% for 9M 2018, EBITDA – 13.1%, the net profit – 39.7%.
As for the principal matters of the conference call, we outline the following:

Negative:
- management has confirmed the expected coal price growth at about 20% for the company in 2019
- the third construction phase of UstSrednekanskaya HEPS is the only one planned be finalized until the end of the current year. Commissioning of Zaramagskaya HEPS has been delayed to 1H 2019. According to management’ outlook, the penalty per month of the delay totals about RUB 40 mn for it.
- unfortunately, the management did not present any aluations of participating in the program of capacities modernization. Lacking any market price-making at the Far East we cannot valuate the NPV and terms of the company’s participation.

- the company’s management gas confirmed the Vostochnaya TPP, commissioned in 2018, still having no tariff for then.
Neutral:
- management presented no exact road map of DVUEK assets entering. Possibly, in case of consolidating those, an additional emission of shares might be avoided.

- CapEx should reduce 22.3% in 2018, yet given just means rescheduling the incomplete objects to the future years. Thus, the investment program should expand 19.8% in 2019; 23.7% in 2021 and 17% in 2022.

- management did not forecast any time constraints on the course of Zagorskaya GAES recovery. Given information is expected in 1Q 2019.

Risks
Possible devaluation of the principal assets and the debt arrearage for 2018 represents the major short-term risk for the quotes of the company. We observe such risks for Vostochnaya TPP and Ust-Srednekanskaya TPP in the annual review. As for a longer term outlook, given is valid for Zagorskaya GAES-2 as well.

Positive factors
We observe the dynamics of funding aimed at equalizing Far Eastern Federal District tariffs being positive for RusHydro. According to the recent numbers, the base tariff totals RUB 4.69, meaning it grows 9.1% YoY. And, if accompanied by growth of funding that is indicated in the company’s report, given should make a positive impact on business profitability of the company at the Far East. Far East stations of the company entering the program on conditions similar to the
DPM-2, would be positive as well. Payment of RUB 17 bn on behalf of Inter RAO for the bought back shares portfolio should compensate the effect of re-evaluation.

Targets and valuation
For 2018, investors will initially focus on the net profit estimate as the company directs 50% of it to dividends. We expect the dividend yield to be below 6% for the next two years due to the low profit. We believe is forms 4.6% for 2018 FY. We observe the 12M net profit for the previous year coming out lesser that the 9M estimate. Assuming, we might observe that again this year. Aside the non-recurring writeoffs, re-evaluation of the forward caused by the progressing decline of quotes, might provide extra pressure on the given estimate.

We upgraded our model, having included new targets on CapEx. Considering the future dividend payoffs, TSR (total shareholder return) is 5.9% for the nearest 12M.

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Tel.: 7 (495) 258 1988, Fax: 7 (495) 258 1989,
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