Page 117 - RusRPTDec18

yield (12+% yield), which deserves to catch investor attention, we think. How soon this happens depends not only on the company (and we believe that increased transparency and management accessibility could easily fast-track this re-rating) but also on general market confidence in the story, which continues to be highly exposed to state regulation (for why these risks are overdone, see our FSK – Better off than MRSKs, of 26 June).
Mosenergo’s era of profitability slippage has officially started, in VTBC’s view, heralded by the publication of its the third quarter of 2018 IFRS financials and the net loss they contained. With a 71% combined bottom line decline until 2021, per our forecasts, the best times for the story look to be gone for some time, and dividend growth never materialised, remaining at a muted 25% payout. We roll forward our model into 2019F and derive a new 12-month target price of RUB 1.55, implying an ETR of -11%. VBTC therefore lowers its recommendation from Hold to Sell. 9mo18 IFRS – first signs of profits slump confirmed. Mosenergo’s 9mo18 results did not surprise us, with the profit drop fully meeting our bearish expectations. Total revenue printed at RUB 135,988mn, translating into flat revenues y/y, with the partial DPM revenue phase out being slightly supported by the production and heat sendout. Total costs increased 3%, leading to adjusted EBITDA of RUB 29,451mn, an 8% y/y reduction, and 2% above our estimates. In the third quarter of 2018, the slide was as much as 52% y/y. Net income decreased 17% to RUB 14,045mn, 3% above our forecasts. For the third quarter of 2018, Mosenergo returned to a net loss, of RUB 1,187mn. The company’s net cash position at the end of the quarter was RUB 22bn. Interestingly, the company’s results presentation now contains a slide titled “Growth Points”, naming modernisation capacity (2.7 GW) and the decommissioning of inefficient capacities as key points to the strategy. Peak profits a thing of the past, but subpar dividends remain. Mosenergo’s peak profitability (RUB 47bn adj. EBITDA in 2017) has passed, and we forecast the company to face a 13% y/y EBITDA slide in FY18F, and another 30% in FY19F, with net income falling even farther in percentage terms. This renders the story not only one that is short on growth, but one in which even those profits there are lack sustainability. Dividend yields are set to slide from 6% in 2017-2018F to 2-3% onwards (at a 25% payout ratio), given a need to finance extensive modernisation through raising new debt, and we expect FY18F net cash hitting almost a zero as early as FY19F. And although in the long term, by 2025F, due to the large exposure to modernisation, we believe that EBITDA could well exceed 2017 peaks, in the short term, with sliding profits, increasing debt and only marginal dividend yields, the story will most fall off the investor radar.
9.2.11 Metallurgy & mining corporate news
Russian government will spend RUB10bn ($150mn) on stockpiling aluminium to support the sanctioned major Rusal, Vedomosti daily reported on November 28 citing the decree signed by Prime Minister Dmitri Medvedev. The money has been granted to the state reserve agency Rosreserv, which manages Russia’s strategic reserves of products. Previous reports suggested that acquiring the metal for state reserve could be one of the government measures to support the beleaguered company controlled by billionaire and Kremlin insider Oleg Deripaska. However, the final decision to buy aluminium was only made after Rusal's board of directors decided to re-register the company in Russia. The new
117 RUSSIA Country Report December 2018 www.intellinews.com