vk.com/id446425943 |
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RusHydro |
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Russia |
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Electric Utilities |
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Forecast changes |
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We update our model for the released operating and financial data, we also |
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incorporate VTBC’s updated economic forecasts, our capex outlook and the change in |
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our write-off assumptions. In addition, we reduce the rate of return for the projects in |
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the Russian Far East to 8.5%, from 14% previously, and roll forward our model into |
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2019. We derive a new 12-month Target Price of RUB 0.71, implying an ETR of 43%. |
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Figure 24: RusHydro forecast changes |
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RUB mn |
2017 |
2018F |
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2019F |
2020F |
2021F |
2022F |
2023F |
2024F |
2025F |
2026F |
2027F |
2028F |
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New forecast |
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Revenues |
348,119 |
372,154 |
373,234 |
386,751 |
401,385 |
418,036 |
437,518 |
469,421 |
487,416 |
512,600 |
531,615 |
551,762 |
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Adj. EBITDA |
97,821 |
114,609 |
112,499 |
119,573 |
128,239 |
134,921 |
143,621 |
164,034 |
175,175 |
188,619 |
200,861 |
218,571 |
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Net income |
22,451 |
40,767 |
26,679 |
50,179 |
34,819 |
60,590 |
63,268 |
38,916 |
64,594 |
76,588 |
103,992 |
119,219 |
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Capex |
71,480 |
81,271 |
113,543 |
109,561 |
90,579 |
86,540 |
100,000 |
100,000 |
100,000 |
100,000 |
100,000 |
100,000 |
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Previous forecast |
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Revenues |
372,771 |
381,226 |
397,379 |
413,045 |
431,493 |
468,434 |
488,402 |
502,466 |
525,881 |
540,824 |
372,771 |
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Adj. EBITDA |
115,861 |
117,775 |
123,816 |
132,599 |
139,520 |
164,270 |
171,800 |
178,035 |
187,408 |
194,522 |
115,861 |
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Net income |
43,096 |
23,943 |
26,200 |
30,535 |
53,524 |
73,045 |
82,978 |
92,176 |
104,221 |
114,819 |
43,096 |
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Capex |
71,480 |
104,831 |
90,878 |
112,532 |
100,398 |
96,360 |
58,111 |
58,111 |
58,111 |
58,111 |
58,111 |
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Change, % |
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Revenues |
-7% |
-2% |
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-6% |
-6% |
-7% |
-11% |
-10% |
-7% |
-7% |
-5% |
43% |
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Adj. EBITDA |
-16% |
-3% |
-9% |
-10% |
-8% |
-18% |
-16% |
-8% |
-7% |
-3% |
73% |
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Net income |
-48% |
70% |
2% |
64% |
-35% |
-17% |
-24% |
-58% |
-38% |
-33% |
141% |
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Capex |
0% |
-22% |
25% |
-3% |
-10% |
-10% |
72% |
72% |
72% |
72% |
72% |
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Source: Company data, VTB Capital Research
22 November 2018 |
14 |
vk.com/id446425943 |
RusHydro |
Russia |
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Electric Utilities |
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Short-term outlook – write-offs distort the picture
RusHydro’s short-term outlook is unimpressive, in our view. The company continues to report large write-offs that fully distort the bottom line, completely unmooring its, and thus dividends’, relation to the company’s underlying profitability. We believe that this is something that would concern investors (see our, Russian Utilities – Roadshow feedback; investors are not happy, of 26 October). Indeed, despite RUB 10bn coming from DPM commissioning in 2019F – partly offset by production moderation due to hydro inflows returning to normal – we believe it is inevitable that the commissioning of the units in the Russian Far East will lead to write-offs in 2019. Thus, RusHydro’s net income would fall by as much as 35% YoY, to just RUB 26,679mn. With a slight appreciation of costs, we forecast EBITDA decreasing by 2% YoY. However, we also expect a RUB 20bn PPE write-off related to Zagorskaya GAES-2 (RUB 60bn in full), on top of the traditional write-offs for projects in the Russian Far East, which will be RUB 17.5bn next year, on our numbers. This RUB 40.9bn of total write-offs in our model suggests a dividend yield of just 7.7% for 2019F. By comparison, MSCI Russia companies offer up to 8.4%, and the current 10-year OFZ YTM is higher, at 8.5%.
Figure 25: RusHydro 2019F adj. EBITDA outlook
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135,000 |
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3,221 |
3,243 |
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2,088 |
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120,000 |
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105,000 |
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RUBmn |
90,000 |
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114,609 |
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112,499 |
75,000 |
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60,000 |
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45,000 |
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30,000 |
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15,000 |
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EBITDA 2018F |
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Revenue |
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Costs |
Other |
EBITDA 2019F |
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Adj |
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Adj |
Source: Company data, VTB Capital Research
Figure 26: RusHydro 2019F net income outlook
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50,000 |
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2,110 |
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3,488 |
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3,522 |
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RUBmn |
40,000 |
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21,097 |
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30,000 |
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40,767 |
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10,000 |
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26,679 |
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20,000 |
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- |
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income 2018F |
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Adj EBITDA |
Net fin exp |
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Tax |
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Other |
income 2019F |
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Net |
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Net |
Source: Company data, VTB Capital Research
However, we do forecast a small restoration in 2020F, with adjusted EBITDA growth of 6% YoY, with write-off moderation, net income could improving 88% YoY to RUB 48,434mn. This would suggest a 11.2% dividend yield only.
Figure 27: RusHydro 2020F Adj EBITDA outlook
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135,000 |
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9,468 |
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2,183 |
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120,000 |
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14,359 |
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105,000 |
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RUBmn |
90,000 |
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112,499 |
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119,573 |
75,000 |
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60,000 |
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45,000 |
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30,000 |
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15,000 |
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EBITDA 2019F |
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Revenue |
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Costs |
Other |
EBITDA 2020F |
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Adj |
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Adj |
Source: Company data, VTB Capital Research
Figure 28: RusHydro 2020F net income outlook
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50,000 |
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RUBmn |
45,000 |
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26,679 |
7,074 |
2,421 |
5,875 |
24,721 |
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50,179 |
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10,000 |
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40,000 |
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35,000 |
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30,000 |
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25,000 |
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20,000 |
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15,000 |
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5,000 |
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- |
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income 2019F |
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Adj EBITDA |
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Net fin exp |
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Tax |
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Other |
income 2020F |
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Net |
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Net |
Source: Company data, VTB Capital Research
22 November 2018 |
15 |
vk.com/id446425943 |
RusHydro |
Russia |
|
Electric Utilities |
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Capex and dividends are debt financed
Another point of criticism is capex. At certain times, RusHydro’s capex is almost at par with its EBITDA, while at a 50% dividend payout policy, the company has to keep increasing debt – even as capex climbs ever higher despite previous announcements about reducing it. We thus forecast that RusHydro’s current capex plan will be upgraded (see our RusHydro – 1H18 IFRS; strong numbers, future capex to grow, of 29 August). Moreover, taking a closer look at RusHydro’s cash generating capacity in 2018F, it is not hard to infer that its hydro assets are subsidising the loss-making Far Eastern operations: excluding government subsidies, the latter have negative EBITDA (RUB 7,665mn) on our 2018F estimates vs. the former’s RUB 93.6bn. The tax expenses, increased finance costs, forward payments, dividends, capex and debt repayment force RusHydro to raise more debt, along with the share issue. Moreover, taking into account that current capex does not (apart from the DPM project) have any proper return attached to it, RusHydro is not improving its ROIC and continues with the large write-offs, unable to recover investments in the Russian Far East due to the current tariff regime.
Figure 29: RusHydro FCFF yield vs. dividend yield, %
50% |
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41% |
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35% |
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40% |
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32% |
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23% |
27% |
27% |
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30% |
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23% |
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1% |
3% |
3% |
7% |
3% |
3% |
7% |
8% |
11% |
9% |
14% |
13% |
12% |
14% |
17% |
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20% |
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7% |
3% |
9% |
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12% |
16% |
14% |
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10% |
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0% |
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-1% |
-3% |
9% |
-3% |
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-3% |
-2% |
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-10% |
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- |
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-20% |
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2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018F |
2019F |
2020F |
|
2021F |
2022F |
2023F |
2024F |
2025F |
2026F |
2027F |
2028F |
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Dividend yield |
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FCFF yield |
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Source: Company data, VTB Capital Research
Figure 30: RusHydro debt vs. leverage
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350,000 |
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2.11.9 |
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2.5 |
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2.0 |
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300,000 |
1.71.5 |
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1.3 |
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1.0 |
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1.01.11.11.1 |
1.1 |
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1.5 |
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250,000 |
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0.9 |
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1.0 |
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0.7 |
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0.7 |
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RUBmn |
200,000 |
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0.40.2 |
0.5 |
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- |
x |
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150,000 |
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(0.5) |
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100,000 |
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(1.0) |
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50,000 |
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(1.5) |
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(2.0) |
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- |
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(2.5) |
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|
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018F |
2019F |
2020F |
2021F |
2022F |
2023F |
2024F |
2025F |
2026F |
2027F |
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Debt, RUBmn |
Net Debt/EBITDA, x |
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Source: Company data, VTB Capital Research
22 November 2018 |
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vk.com/id446425943 |
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RusHydro |
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Russia |
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Electric Utilities |
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Valuation |
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We continue to value RusHydro on a DCF basis. We have updated our model for the |
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released financial and operational data, write-offs and new capex guidance, as well as |
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the lower the rate of potential return for modernisation in the Russian Far East, |
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specifying the commissioning dates. We also roll our model forward into 2019 and add |
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2028 to the valuation. |
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We thus derive a new FCF outlook, with it being negative in 2019F and 2020F. We |
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see significantly positive FCF only after 2024F. |
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Figure 31: RusHydro DCF valuation |
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RUB mn |
2017 |
2018F |
2019F |
2020F |
2021F |
2022F |
2023F |
2024F |
2025F |
2026F |
2027F |
2028F |
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Forecast year |
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- |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
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EBIT |
47,792 |
65,392 |
44,295 |
76,090 |
57,667 |
87,292 |
90,851 |
60,362 |
90,999 |
103,680 |
135,197 |
151,254 |
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Tax on EBIT |
(9,558) |
(13,078) |
(8,859) |
(15,218) |
(11,533) |
(17,458) |
(18,170) |
(12,072) |
(18,200) |
(20,736) |
(27,039) |
(30,251) |
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Depreciation and Amortisation |
25,023 |
25,757 |
27,300 |
29,484 |
32,666 |
33,629 |
35,503 |
37,777 |
37,601 |
38,363 |
39,088 |
40,741 |
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Bad debt |
5,957 |
6,368 |
6,387 |
6,618 |
6,868 |
7,153 |
7,487 |
8,033 |
8,341 |
8,772 |
9,097 |
9,442 |
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PPE sale with loss |
1,006 |
21 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
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Share of results of associates |
(417) |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
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Other adjustments before WC |
23,778 |
23,440 |
40,904 |
14,000 |
37,906 |
14,000 |
17,267 |
65,894 |
46,576 |
46,576 |
26,576 |
26,576 |
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Changes in NWC, incl: |
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Decrease/(increase) in trade and |
(13,483) |
(5,702) |
(256) |
(3,207) |
(3,472) |
(3,950) |
(4,622) |
(7,569) |
(4,269) |
(5,975) |
(4,511) |
(4,780) |
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other receivables |
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(Increase) in inventories |
(1,604) |
(1,762) |
(79) |
(991) |
(1,073) |
(1,221) |
(1,428) |
(2,339) |
(1,319) |
(1,846) |
(1,394) |
(1,477) |
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(Increase)/Decrease in other |
859 |
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- |
- |
- |
- |
- |
- |
- |
- |
- |
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current assets |
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Decrease in other non-current |
(1,592) |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
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assets |
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Increase in trade and other |
(2,236) |
2,942 |
(416) |
1,146 |
1,057 |
2,309 |
2,426 |
2,523 |
1,026 |
2,660 |
1,033 |
1,122 |
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payables |
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(Decrease)/increase in taxes |
891 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
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payable, other than income tax |
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Increase in other non-current |
7,674 |
(6,860) |
(3,180) |
(3,460) |
(2,772) |
- |
- |
- |
- |
- |
- |
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liabilities |
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Capex |
(71,480) |
(81,271) |
(113,543) |
(109,561) |
(90,579) |
(86,540) |
(100,000) |
(100,000) |
(100,000) |
(100,000) |
(100,000) |
(100,000) |
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Free cash flow, RUBmn |
12,610 |
15,246 |
(7,448) |
(5,099) |
26,736 |
35,214 |
29,313 |
52,610 |
60,754 |
71,493 |
78,046 |
92,627 |
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WACC |
15% |
14% |
14% |
14% |
13% |
14% |
14% |
14% |
14% |
14% |
14% |
14% |
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Discount factor |
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1.00 |
0.88 |
0.78 |
0.68 |
0.60 |
0.53 |
0.47 |
0.41 |
0.36 |
0.31 |
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PV (FCFF) |
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(7,448) |
(4,490) |
20,784 |
24,067 |
17,612 |
27,830 |
28,295 |
29,210 |
27,941 |
29,017 |
Source: Company data, VTB Capital Research
This leads us to EV of RUB 410,429mn and along with RUB 110,351mn net debt in 2019F suggests a new 12-month Target Price of RUB 0.71 per share, translating into a 43% ETR (USD 1.07/GDR). We thus maintain our Buy recommendation.
Figure 32: RusHydro DCF valuation summary, RUB mn
Terminal growth |
2% |
PV(Terminal value) |
246,628 |
PV(Present value) |
163,801 |
EV |
410,429 |
Net debt 2019F |
110,351 |
Equity value |
300,077 |
Total shares outstanding, mn |
422,436 |
Target share price |
0.71 |
Current share price |
0.53 |
Upside, % |
34% |
ETR, % |
43% |
Source: Company data, Bloomberg, VTB Capital Research
22 November 2018 |
17 |