Page 7 - FSUOGM Week 11

FSUOGM COMMENTARY FSUOGM
We stick to the futures curve as the most reliable source of the oil price mark up,” says BCS GM.
Banking
From the banking sector, BCS GM added the investor’s darling TCS Group, the parent of Tinkoff bank, Russia’s only purely online bank that has been a consistent outperformer in the market in recent years and is seen as a proxy for both the tech sector and rising personal incomes.
“The stock lost -47% between 11 January and 9 March on the back of negative news related to the company’s majority shareholder [Oleg Tinkov, who has been hit with a US extradition warrant on tax fraud charges and who has also admitted he is suffering from leukaemia],” said BCS GM. “However, TSC has released positive 4Q19 earnings, which came above the consen- sus. The bank is also resuming its dividend pay- ments, announcing $0.21 per share. The stock offers triple-digit upside of 118% to our sector team’s 12-month Target Price, with 2020F P/E of 6.2x.
Less popular but still a favourite in the finan- cial sector is Bank St Petersburg (BSPB), which BCS GM also has marked as a Buy. The bank’s earnings recovered 19% quarter on quarter to RUB2.4bn in the 4Q19, implying a 12% ROE and a bottom line that was 4% above consensus, with a higher than expected net interest income (NII). FY19 earnings declined 5.7% year on year to RUB31bn and implied 10.2% ROE (in line with FY19 guidance), BSC GM reported.
“We consider results positive. However, in our view, the company’s updated 2020 outlook ischallengingintermsofloangrowth,andmore conservative on cost of risk (CoR) and opex growth than the previous outlook and our esti- mates. We see minor downside risks to our esti- mates and [a] 12-month Target Price of RUB86. Given an 86% estimated total return (ETR), we reiterate our Buy recommendation,” BSC GM said.
Electricity
And utilities remain in focus. The power sector has been strongly outperforming the market in the last nine months as the current investment cycle comes to an end that has seen capex fall, free cash flow rise and dividends remain strong. The sector was the only one to resist the selling pressure after the January peak in the RTS index passed, but share prices amongst the utilities have collapsed along with the rest of the market in the last week and were down 32% YTD last week.
BCS GM highlighted OGK-2 as a Buy in this sector after it reported its bottom line expanding
a record 50% to more than RUB12bn in the 4Q19, “and is heading for a RUB6bn dividend, delivering a 9% yield,” the bank said. “How- ever, the REP Holding purchase has left only RUB1.6bn of free cash flow (FCF), so most of the cash for investors is to be sourced from debt. We believe there is still value on the table for OGK-2, but note substantial corporate governance risks. We reduce our 12-month Target Price [by] 6% to RUB0.82 and reiterate our Buy recommenda- tion with a ETR of 47%... Stable profits and a 50% payout are the key pillars of our investment case for OGK-2.”
Share price weakness has also “put Federal Grid Company (FSK) value into the limelight” says BCS GM, which upgraded the company to Buy on March 16.
FSK consolidation with Rosseti is in the works, and that will change the company’s pro- file. Kommersant had reported that the govern- ment was considering passing FSK’s executive management and treasury functions to Rosseti.
The actual share consolidation – either through voluntary conversion of FSK shares into an additional share issue of Russian Grid, or through mandatory conversion approved by FSK shareholders – is yet to be clarified, BSC GM reports.
“FSK contributes 50% to Rosseti’s con- solidated free cash flow (FCF) and 48% to its EBITDA – and is thus the holding’s key pillar in our view,” says BSC GM. “Taking into account the value of FSK to the umbrella company, we believe it likely that minority investors would be well incentivised to accept a possible share swap ifsuchascenarioweretomaterialise.”
FSK shares have lost 30% since their peak on February 21, 2020, and, driven by general market weakness, now trade at a level last seen in August 2019, reports BCS GM.
“We believe that this is unjustified, given i) the reported FY19 IFRS numbers, which demonstrate the sustainability of the company’s profitability, ii) the dividend floor of RUB0.016, implying a yield of 9.4% to the market price (residual July payment of 4.2%), iii) the absence of profit volatility throughout our forecasting period, and iv) the dividend growth trajectory, which would deliver shareholders 18.7% yield by 2025F,” BSC GM argued.
BSC GM has not changed its 12-month Tar- get Price despite the sell-off, which implies an upside to current prices of 37%. “We upgrade FSK to Buy from Hold. While the potential con- solidation into Rosseti adds uncertainty to the future of the name, we believe such a move is unlikely to be value-destructive for minorities,” BSC GM added. ™
Week 11 19•March•2020 w w w . N E W S B A S E . c o m P7