Target: 0.87 RUB, BUY
Disappointing Capital Markets Day
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We updated our DCF model and incorporated latest operating and financial data. As a result, our 12M target price was cut down from RUB 1.0 to RUB 0.87, with a BUY recommendation unchanged. We do not see any positive triggers for HYDR within next 6 months. Still, after a recent 14% plunge in the HYDR shares we assume there is no potential for any further decline.
In the end of December the company presented unimpressive results for 9M2017: core revenue (exgovernment grants) grew by 1.4% YoY; EBITDA grew by 4.6%. Net income decreased by 15.2%. Operating expenses grew up by 5.5%.
IFRS results were broadly in line with our guidance. However, we note a net income decrease, which was mainly due to change of fair value of forward contract and various impairments. This a negative for us because it implies that dividends for 2017 will be less than in 2016.
Capital markets day
The company held an Investor Day on December 19th where the management commented on the latest financial results and presented a short-term outlook. Our key takeaways are the following:
- The management plans an additional share issue of RUB 13-14 bn in short-term.
- Zagorskaya PSPP-2 reconstruction is suspended until 2020
- Dividend policy remains unchanged (50% payout ratio)
- Capital expenditures till 2022 are 3.1% above the previous plan We also note that from July of 2017 RusHydro started to receive government grants to subsidize electricity tariffs in Far East region. The base tariff in that regions will be is 4.3 RUB/kWh in 2018 and subsidies will reach RUB 35 bn. Receivables overdue should decrease but the effect should be limited, in our view.
The fact that 50% IFRS payout is kept unchanged is a negative because net income on the background of forward contract with VTB Bank will be very volatile in the nearest future. We expect a
modest dividend yield of 4.9% for 2017. Due to a negative effect of forward contract, FCF dividend base would be more attractive for shareholders.
Among positive moments we see an intention of the management to cut down on operating expenses up to RUB 15 bn per annum and a possible introduction of a 3rd price zone in Far East. Also, due to an additional share issue for VTB Bank and a reasonable borrowing policy HYDR has a comfortable Net Debt/EBITDA ratio of 1.4x.
We updated our DCF model and decreased RusHydro target price by 13% to 0.87 RUB/share. This implies an upside of 19.7% so we keep our “BUY” recommendation unchanged. TSR within next 12 months is 24.3%. We also included a RUB 5 bn additional share issue, which is planned in 2018 according to the latest CEO comments.
Outlook and stock drivers
Next year promises to be challenging for RusHydro due to an all-time-high CAPEX, additional share issue and a decrease of generation. We hope to see OPEX cuts, Far East regulation change and a start of DPM-like modernization wave. Regulatory risks are still an integral part of this investment case, but we are optimistic about HYDR shares due to an efficient hydro business, commissioning of new capacities and high generation that is expected in 2017.
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