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10 I Companies & Markets bne March 2020
Russia's utility sector is on a roll. The sector shares were up a whopping 16% in mid-February while the rest of the market has given up all its January gains.
Russia’s utility sector set to rally in 2020 as reforms progress
Ben Aris in Berlin
After a very strong rally in the first half of January, Russia’s stock markets have been hit by fears of a global coronavirus epidemic and collapsing oil prices which have led the market to give up all its gains made year to date. But not so the utilities sector, where share prices have surged by 16%. Currently the power sector is the only sector that is performing well and is set to lead the stock market for the rest of the year.
“The world is slowly but persistently moving toward electricity as the main source of final energy. We estimate that the share of electricity has more than doubled over the last 30 years to 19%. Russia has not ignored this process,” Vladimir Sklyar,
an equity analyst with VTB Capital (VTBC), said in a note.
The emerging middle class has been a big source of new demand for electricity. In the Soviet era televisions famously either didn't work or they blew up when you turned them on. But modern Russia has embraced gizmos as its badge of membership of capitalist society. And the sheer size of the country means railways and telecom networks, their reform and development, are also driving up demand rapidly.
“At the start of this new year, we try to answer a simple question: are Russian utilities a Buy in 2020? A helicopter view on the metrics and sentiment gives a simple answer: yes. Russian utilities are profitable, growing, underleveraged, free cash flow-rich, cheap and generous names in the Russian
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equity universe with management teams that are already, or are soon to be, motivated by clear and transparent market mechanisms,” Sklyar said.
Russian utilities shares valuations are currently about 50% cheaper than the rest of the Russian market compared on both an EV/Ebitda and p/e basis. That means despite the rally of the last six months there is still more room for growth.
Finally, leading utilities operating in Russia have begun the process of shuffling their generation profile to reflect the rapidly growing concern with the climate crisis and reducing emissions. In one of the most notable deals of 2019 the Russian subsidiary of the Italian power generation company Enel sold off one its largest power stations as it is coal fired, but has been investing heavily in renewable energy sources to replace the missing capacity.
Investors have woken up to the growing potential of the power sector and the shares of listed utilities started to rally
in the second half of 2019. After a strong first fortnight in 2020 Russian stocks have sold off heavily as investors become “risk on” again thanks to the outbreak of the coronavirus. Not utilities though. While the RTS index had given up all its gains as of the middle of February and most of the other sector had returned 4-5%, the utilities sector was up by a handsome 16% YTD as of the time of writing.