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Russia

Equities

Aeroflot – Boarding the next long-haul flight, of 6 November, by Elena Sakhnova et al

Enel Russia – Strategic view - to SPO or not to SPO?, of 6 November, by Vladimir Sklyar et al

Sberbank – 10mo18 RAS; no surprises, of 8 November, by Mikhail Shlemov et al

Week Endnotes

On companies

Our fundamental ratings and 12-month Target Prices for the stocks are contained in Figure 7.

Investment views updated this week

Recommendation changes

Aeroflot, which has been suffering from turbulence, now provides an attractive entry point for those who share our view on management’s potential to implement the new five-year strategy: ‘100mn passengers by our 100th anniversary’. Pobeda, Aeroflot’s fast growing low cost subsidiary, is to be the backbone of growth, revealing the incremental demand from the low-income part of the population. Developing the transit potential is another point of focus. With management’s track record of delivering previous strategic targets ahead of time, we included the new goals into our model. On the back of this, we raised our 12-month Target Price to RUB 130 and upgraded our recommendation to Buy (from Hold).

12-month Target Price changes

As we review Enel Russia’s 3Q18 numbers, and roll our model and outlook over to FY19, we pay attention to the company’s 5-year strategic outlook and consider the options which management faces right now. Our conclusion is that Enel Russia faces a choice between notably scaling down its business or opting for a growth plan which would require significant additional financing. Whatever the plan, we believe shareholders are going to face negative headwinds and Enel’s management needs to demonstrate its ability to find the right path, including considering an SPO.

Earnings and operating results this week

A list of the 3Q18 operating and earnings reports published by our teams can be found in Figure 4. For the compendium of the VTB Capital 3Q18 earnings season preview, see our Earnings Watch – 3Q18 earnings preview, of 18 October.

3Q18 earnings season – moderate week for surprises. Rosneft‘s revenues (not accounting for purchases) and EBITDA were broadly in line with our forecast, while EBITDA and net income came below the consensus. The company reported strong free cash flows, driven by a combination of strong oil prices, weak local currency and tax reliefs. Polyus published slightly positive 3Q18 earnings thanks to lower costs and capex. Natalka reported higher costs during the ramp-up phase. Moscow Exchange posted 3Q18 NI of RUB 5.1bn, in line with the consensus and -2% below our forecast. However, EBITDA was RUB 7.1bn, -1% below the consensus and -2% less than we had forecast, with both F&C income and NII falling below expectations. Opinc was weaker than we had expected; however, in our view, in 4Q18, higher rouble rates and solid trading will be supportive for MOEX’s financial performance. Alrosa reported slightly positive 3Q18 results. On the one hand, costs were lower than we and consensus thought, but on the other, FCFE adjusted for the insurance premium was lower and the sales guidance was downgraded. TGK-1 released its 9mo18 IFRS results on 7 November. Net income improved 26% YoY and slightly exceeded our estimates, though as we expected it posted a deceleration in growth. The financials suggest that the company is not getting ready for the 50% dividend payout, taking into account the cash balances and accelerated deleveraging.

Sberbank published October and 10mo18 RAS results that we view as solid: earnings were RUB 72.8bn (+14% YoY, ROE 23.8%). The operating trends were intact, with ongoing NIM contraction (three-month rolling -11bp MoM/-90bp YoY) offset by i) low CoR of 63bp in October with the 12-month rolling down to 153bp; and ii) fee growth up +13% YoY in October (10mo +21% YoY). Strong loan-growth momentum remains intact, with +15% growth YoY. We expect the stock to react positively, with RAS numbers supporting the continuation of strong trends in the recent 3Q18 IFRS results.

vk.com/id446425943

Russia

Equities

Severstal – Capital Markets Day 2018; capex rises, but dividend outlook shielded, of 8 November, by Dmitry Glushakov et al

TMK – might have agreed RUB 21bn LDP supply contract with Gazprom before April 2020 – positive, if materialises, of 8 November, by Ekaterina Rodina et al

NLMK – preliminary maintenance capex guidance for 2019-22 is USD 400mn – above our estimates – slightly negative, of 9 November, by Dmitry Glushakov et al

RusHydro – CEO plans to "continue working on market cap growth" – is not certain 14% return on Russian Far East projects will be provided, of 8 November, by Vladimir Sklyar et al

RusHydro – 2018 capex guidance cut

– but postponed to later periods – expected, of 9 November, by Vladimir Sklyar et al

Unipro – company is ready to accept FAS fine – positive, of 9 November, by Vladimir Sklyar et al

Unipro – 9mo18 dividend recommended at RUB 0.111/share – positive, of 6 November, by Vladimir Sklyar et al

Week Endnotes

In focus

Severstal’s Capital Markets Day might have a mixed impact on the company’s fundamentals: on the one hand, the company sees its capex rising sharply in 2019-20 but, on the other, the company has tweaked its dividend policy so that this does not affect the dividend outlook. It remains to be seen whether the company manages to achieve what we see as its ambitious target of 10-15% EBITDA gains for the next five years through announced capex.

Also in the news

TMK might have agreed with Gazprom on RUB 21bn worth of direct deliveries of 255kt large diameter pipes (LDP) before April 2020, reports Interfax, citing unnamed sources. The pipes would be used by Gazprom for the expansion of the Sakhalin- Khabarovsk-Vladivostok pipeline. The contract represents 5% of TMK’s revenue in 2019-1Q20F and more than 70% of the LDP currently produced by TMK. The company is able to increase LDP production significantly next year, as its current capacity utilisation is relatively low (below 40% LDP capacity utilisation in 2018F, we forecast).

According to Interfax, NLMK has announced its preliminary capex guidance for 2019-22 of USD 400mn, with more exact guidance to be provided during the Investor Day in 1Q19. The main reasons for the high figures are the extensive repair plans in the coming 2-3 years. The guidance is 26% above our forecast of sustainable capex for 2019-22 and decreases the company’s FCFE for the period 4-5%, on our numbers.

Interfax has reported on a few important developments at RusHydro, quoting CEO Nikolai Shulginov. According to him, the company is not undertaking any special measures not to drop out of the MSCI index, and though this could have negative consequences, management’s aim is to increase the market capitalisation in general, rather than specifically for the MSCI criteria. Shulginov noted that the terms for the modernisation of capacities in the Russian Far East were not yet clear and could differ from those for the modernisation of thermal capacities in the pricing zones. And despite the fact that RusHydro expects a 14% guaranteed return attached to the projects, in line with other markets, the company would be ready to accommodate the projects with whatever return the government is to provide. RusHydro has already announced the tender for the development of modernisation projects as this requires between 12 and 18 months. In the meantime, Interfax has reported, citing RusHydro’s bonds prospectus, about the company’s updated capex for 2018. According to the article, the latest capex expectations for 2018, approved by the Board of Directors on 2 October, suggests that RUB 96.7bn in investment is planned for 2018, compared with the previous guidance of RUB 124.5bn. Among the key reasons for the capex cut it listed the schedule for implementing and constructing the projects, as well as the optimisation of maintenance capex.

According to Kommersant, Unipro is offering a settlement agreement to the Federal Anti-Monopoly Service related to the accident at Berezovskaya GRES’s unit 3 in February 2016. As far as we understand, the company is ready to accept that it unjustifiably received RUB 950mn in revenues from the market after the unit was down and to accept a RUB 650,000 fine. According to the article, the company's only requirement is that FAS recognises that the fire did not lead to the destruction of the core equipment and the nominal capacity of the unit did not change. In the meantime, on 2 November, Unipro announced that the Board of Directors had recommended an interim dividend of RUB 0.111/share, with the record date set at 18 December. This recommendation is both positive and expected, as management had previously guided for RUB 7bn of dividends to be paid in December 2018-January 2019.

vk.com/id446425943

Russia

Equities

TGK-1 – 9mo18 IFRS; profits on track, dividends not in sight, of 9 November, by Vladimir Sklyar et al

Etalon – potential sale of Zarenkov family's stake to Sistema – company has faced headwinds this year, of 8 November, by Maria Kolbina et al

Week Endnotes

TGK-1 released its 9mo18 IFRS results on 7 November. Net income gained +26% YoY, 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 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.

According to Vedomosti, the Zarenkov family might sell most of its stake in Etalon to Sistema as early as this week. Etalon has 423,000sqm of completions in 2017 and 1.1mn sqm under construction at the moment. As of 30 June 2018, Etalon’s total group project portfolio stood at 2.7mn sqm. The Zarenkov family is a key shareholder, with 31% as of the same date (with 3% belonging to management, 6% to Baring Vostok and the remaining 61% in free float). Uncertainties about the shareholder structure have become a significant headwind for Etalon's investment case of late, with the stock is down -26% YTD amid robust operating results. The paper cited its sources on the potential purchase of a stake of just below 30% to avoid a mandatory tender offer for Sistema.