Page 116 - RusRPTDec18

weakness over the last 12 months, that the economics of this project might be under pressure," VTB warns and estimates that the IRR (internal rate of return) of this project could already be tending towards a single-digit figure (rather than the 12% post-tax guaranteed return).
TGK1 released its 9mo18 IFRS results on 9 November. Net income gained 26% y/y, slightly beating our estimates, albeit growing at a slowed pace. The financials suggested that TGK1 is not preparing for a 50% dividend payout, taking into account the cash balances and accelerated deleveraging. We have updated our model and rolled it forward into 2019F, taking a closer look at the 2019 outlook, which suggests a profitability plateau for the company in coming years. Along with stability, but no growth, in profitability metrics, we forecast a 6-7% dividend yield at a 25% dividend payout that is unlikely to change, in our view. We believe that this is subpar. Thus, we do not see any short-term triggers that could immediately cause the stock to rerate. VTBC’s unchanged 12-month Target Price of RUB 0.013 implies an ETR of 54%. Buy reiterated.
Eurasian Development Bank (EABR) has won the tender to provide RUB 9.5bn of project financing for the construction of a wind farm in the Rostov region, undertaken by Enel Russia. Enel Russia plans to commission the 90MW wind farm, consisting of 78 wind turbines, by 2020, with a projected cost of EUR 132mn. Securing project financing is a major milestone for the wind project and significantly lowers the risks of project delays. However, one concern we have about this news is the mismatch between the capacity bid, with which Enel Russia won this tender (it agreed to commission 90MW at RUB 92,160/MW, or total capex of some RUB 8.3bn), and the size of the loan (it is already 15% higher than the originally envisioned capex). It seems, taking into consideration the EUR-denominated price of the equipment and rouble weakness over the last 12 months, that the economics of this project might be under pressure. Our calculations show that the IRR of this project could already be tending towards a single-digit figure (rather than the 12% post-tax guaranteed return), if the cost overrun is confirmed.
FSK’s 9mo18 IFRS results, released on 16 November, were decent on the underlying profitability side, showing the resilience of the company’s profits. Limited investment needs for modernisation, a sustainable profit outlook and attractive dividend yield levels above the MSCI Russia average make FSK’s story a vote of confidence from investors, in our view. We update our model and roll it forward into 2019, deriving a new 12-month Target Price of RUB 0.20 (up 5%). That implies an ETR of 44%: Buy reiterated. 9mo18 – another 11% nominal net income expansion. FSK’s 9mo18 IFRS results, reported on 16 November, yet again showed an 11% improvement in profitability. Revenues printed at RUB 174,395mn, up 9% y/y and supported by a 13% y/y increase in transmission revenues, despite grid connection revenues slumping 95% y/y owing to the applications and their schedule. Along with a 26% y/y costs increase, adjusted EBITDA (company’s calculation) stood at RUB 101.7bn, suggesting a 0.6% y/y reduction. Net income remained elevated, with an 11% y/y increase to RUB 57,955mn. Capex was up 5% y/y, while net debt printed at RUB 204,323mn. Future dividends continue to look double-digit. FSK continues to deliver on expectations. Its tariff growth, despite the government plan for CPI-capped growth in the last two years, exceeded inflation, its grid connection fees (an important ingredient of profits) still contributes 10-20% of net profits, while management continues to share created value through a nominal 50% payout dividend policy (28% effective, according to our calculation). All this gives ground to expect FSK to continue delivering a RUB 0.018+/share dividend, translating into a double-digit dividend
116 RUSSIA Country Report December 2018 www.intellinews.com