UNIPRO Still BUY after Berezovskaya News

Transcription

1 16 August 2017 EQUITY RESEARCH UTILITIES UNIPRO Still BUY after Berezovskaya News BUY Target Price RUB3.18 Upside potential 37% Bloomberg, local UPRO RX Price, local (RUB) 2.32 Upside potential, local 37% Share data # of shares (mn) 63,049 Daily t/o ($mn) 1.4 Free float (%) 16% Market capitalisation ($mn) $2,449 Enterprise value ($mn) $2,003 Shareholding Uniper 83.7% FINANCIALS (RUBmn) E 2018E Revenue 78,032 79,022 84,286 EBITDA adj 23,994 44,807 26,684 Net income 5,166 31,125 15,943 EPS (RUB) DPS (RUB) VALUATION EV/Sales (x) EV/EBITDA (x P/E (x) P/B (x) EV/kW, $/kw RoE (%) 5% 29% 14% ROIC (%) 4% 25% 12% FCF yield (%) 7% 19% 2% Dividend yield (%) 5% 8% 8% PERFORMANCE 1 month -8% 3 months -10% 12 months 1% 52-week high (RUB) week low (RUB) 2.3 All prices correct as of COB 16 Aug 2017 Source: Bloomberg, ATON estimates ALEXANDER KORNILOV, CFA +7 (495) alexander.kornilov@aton.ru After last week s 2Q17 earnings release and call we refreshed our Unipro model to incorporate the new Berezovskaya (BTPP) recovery guidance (capex and timeframe). The stock still combines a good earnings growth case supported by attractive dividend potential, with ample dividend upside after the damaged unit s recovery. We maintain our BUY call especially after the stock correction last week, while we cut our 12M target price to RUB3.18. Stock Trading Lower than Right after the Accident Unipro shares lost 6% after news last week that the recovery capex estimate for Berezovskaya TPP 800MW s recovery has been increased, while the timeframe for the unit s relaunch has been shifted to 3Q19. In fact the stock is now trading well below the level it touched when the market first reacted to the accident in Feb This is particularly strange given the huge difference in certainty regarding the damaged unit s recovery prospects then and now. This points to a market overreaction, in our view. Model Updated with New Guidance, TP Cut to RUB3.18, BUY Maintained We refreshed our model with the last week s 2Q17 earnings results and conference call details. In particular, we incorporated the higher remaining recovery capex of RUB28bn, and shifted the re-launch of the Berezovskaya unit to the end of 3Q19 instead of the beginning of 2019 as we assumed before. This dragged down our earnings and cash flow estimates with the most dramatic effect being on the 2019 outlook which suffered tremendously from the delayed CSA unit s re-launch. We cut our 12M price target to RUB3.18/share from RUB3.55/share while maintaining our BUY call given that the stock is now offering 37% upside potential as well as an 8% annualised dividend yield. Dividend Opportunity in Place, Ample Dividend Upside after Re-launch The company reaffirmed its plans to pay RUB12bn (RUB0.19/share) in dividends this year, while also stating that it hopes to pay the same dividend in This implies an 8% annualised dividend yield (dividends are paid twice a year) thus ranking Unipro one of the most attractive dividend names in the Russian utilities space currently. Furthermore, we believe the debt-free Unipro is well-equipped to markedly boost its dividends as of 2019 after Berezovskaya s recovery has been completed, with a good chance of offering an over 20% dividend yield as of Berezovskaya Recovery is the Main Risk, but Valuation Sensitivity Limited Our sensitivity analysis reveals that a hypothetical 25% increase in Berezovskaya s recovery capex estimate cuts the DCF value by a moderate 2.5%, while a one-year delay in the unit s re-launch drags our DCF valuation down by 7.5% with each month s delay biting off 0.6%. This indicates that Unipro s existing business is strong enough to restrain the influence of Berezovskaya s recovery prospects on the company s value. Risks Besides the aforementioned Berezovskaya TPP recovery case, increasing competition with other power plants this has already resulted in a production cut in 1H17 and lacklustre power consumption dynamics are two key risks that we see for Unipro. The next modernisation investment phase is another risk given the lack of certainty over potential investment returns. For professional investors only. This document has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Please refer to important disclosures and analyst certification at the end of this document

2 UNIPRO BUY Bloomberg ticker UPRO RX Closing price RUB2.32 Target price RUB3.18 Return to TP 37% Shares outstanding 63,049 Market Cap, $mn $2,449 Free float 16% Av trading vol., mn/d $ Week Range Figure 2: UPRO performance Aug Sep Oct Nov-16 UPRO RX Equity MICEX Index rebased 16-Dec Jan Feb-17 Figure 3: Unipro FCF, $mn $500 19% $400 $300 $200 $100 $0 7% 7% Mar-17 Source: xxxxxxxx 16-Apr May Jun Jul-17 Source: Bloomberg, ATON Research 2016 FCF, $m (lhs) 2017E 2% 2018E 9% 2019E FCF yield, % (rhs) 5% 0% Unipro (formerly E.ON Russia) is a thermal power generator 84% owned by Germany's Uniper. The company's five TPPs are scattered across the country from Central Russia to Siberia, with total installed capacity of 11.2GW. In Feb 2016 Unipro experienced a severe fire at the newly-built 800MW coal-fired unit of Berezovskaya TPP in Siberia that led to its complete shutdown. The recovery of this unit is currently Unipro s core investment effort, with capex estimated at approximately RUB36bn and an expected re-launch in 3Q19. Unipro received RUB26bn insurance compensation. 16-Aug-17 25% 20% 15% 10% 2 Figure 1: Unipro snapshot MACRO ASSUMPTIONS E 2018E 2019E USD/RUB average exchange rate Electricity price, Europe, RUB/MWh 1,154 1,203 1,181 1,216 1,253 Electricity price, Siberia, RUB/MWh Russia gas price, RUB/mcm 3,704 3,876 3,990 4,110 4,234 Capacity price, Europe, krub/mw/month Capacity price, Siberia, krub/mw/month OPERATIONS E 2018E 2019E Installed electric capacity (operational), MW 11,145 10,405 10,405 10,405 11,205 Capacity sold under CSA, MW 2,400 1,600 1,600 1,600 2,400 Electricity output, mn kwh 53,767 54,530 50,692 53,066 54,568 Load factor, % 55% 60% 56% 58% 56% Heating output, ths Gcal 2,035 2,151 2,262 2,262 2,262 INCOME STATEMENT E 2018E 2019E Electricity and capacity 74,397 75,705 76,519 81,622 88,306 Heating 1,217 1,294 1,388 1,471 1,516 Other 1,091 1,032 1,115 1,193 1,253 Total revenues 76,706 78,032 79,022 84,286 91,075 Fuel costs 35,498 37,949 35,840 38,583 40,504 Other cash costs 19,353 22,273 18,917 19,862 21,849 Total cash costs 54,852 60,222 54,756 58,446 62,352 D&A charge 7,493 6,646 6,622 7,163 8,091 Operating income 16,715 6,718 38,185 19,520 21,542 Pre-tax income 17,421 7,220 38,755 19,989 21,660 Net income 13,676 5,166 31,125 15,943 17,276 EBITDA 24,208 23,994 44,807 26,684 29,633 BALANCE SHEET E 2018E 2019E Cash & cash equivalents 9,363 1,725 6,695 1,686 1,821 Accounts receivable 5,780 5,245 6,046 5,665 6,122 Inventories 2,167 2,305 2,657 2,490 2,690 Current assets 18,810 10,054 16,498 10,941 11,733 PP&E net 105,903 96, , , ,734 Total assets 126, , , , ,373 Short-term debt - 2,308-3,952 5,294 Accounts payable 6,675 5,252 6,054 5,673 6,130 Total current liabilities 8,905 8,578 7,227 6,772 7,318 Long-term debt Minority interest Total shareholders' equity 110,108 94, , , ,420 Total liab. & equity 126, , , , ,373 Net debt -9, ,695 2,266 3,473 CASH FLOW STATEMENT E 2018E 2019E Cash flow from operations 22,428 23,537 40,275 25,386 27,218 Thereof WC changes 123-3, Cash flow from investments -9,569-13,095-13,000-22,300-14,552 Thereof capital expenditures -12,168-13,669-13,000-22,300-14,552 Cash flow from financing activities -17,558-17,556-22,305-8,096-12,530 Thereof dividends -17,399-19,738-12,000-12,000-13,821 PER SHARE RATIOS E 2018E 2019E EPS BVPS DPS VALUATION RATIOS E 2018E 2019E P/E EV/EBITDA EV/kW, $/kw $208 $221 $225 $239 $235 EBITDA/kW, $/kw $35 $34 $72 $42 $44 FCF/kW, $/kw $15 $14 $44 $5 $19 Dividend yield 12% 14% 8% 8% 9% FCF yield 7% 7% 19% 2% 9%

3 What has Changed? We refreshed our Unipro model, with the company s 2Q17 earnings published last week, and new recovery guidance for Berezovskaya TPP 800MW coal-fired unit that is worse than we expected. The company has boosted its recovery capex estimate to RUB28bn on top of the RUB8bn that it has already spent to date, implying RUB36bn overall. This is RUB11bn above the previous capex estimate of RUB25bn that Unipro management provided earlier, and that we had assumed in our model. Furthermore, the company said that it now expects to re-launch the Berezovskaya unit only in 3Q19 instead of the beginning of 2019 as guided for earlier. We had assumed that the 800MW CSA-paid unit would be fully operational for the entire 2019 year, and therefore would earn CSA capacity payments for 12 months in We now shift the re-launch of the damaged power unit to the end of 3Q19, and assume that Unipro will receive CSA capacity payments for only three months in 2019 with the first fully-operational year being On top of the above most important changes, we also updated our macro assumptions inclusive of day-ahead electricity prices now that the actual 1H17 results are available. Furthermore, we increased our non-fuel cash cost estimates to incorporate higher non-capitalised repair costs associated with the Berezovskaya power plant s recovery. We also reflected the electricity production slide seen in 1H17. Figure 4: Change in earnings outlook (RUBmn) 2017E 2018E 2019E 2020E Revenue - new 79,022 84,286 91, ,521 - old 85,509 89, , ,947 change, % -8% -6% -16% -5% EBITDA adj - new 44,807 26,684 29,633 40,793 - old 47,670 29,819 43,419 44,464 change, % -6% -11% -32% -8% Net income - new 31,125 15,943 17,276 25,701 - old 32,409 18,414 29,414 30,531 change, % -4% -13% -41% -16% OCF - new 40,275 25,386 27,218 34,315 - old 42,661 27,391 38,115 38,275 change, % -6% -7% -29% -10% Capex - new -13,000-22,300-14,552-6,301 - old -17,000-13,000-6,000-6,000 change, % -24% 72% 143% 5% FCF - new 27,275 3,086 12,666 28,014 - old 25,661 14,391 32,115 32,275 change, % 6% -79% -61% -13% Source: ATON Research 3 The abovementioned changes expectedly had an adverse effect on our earnings estimates, as shown in the above table. Our 2019 earnings estimates were hit particularly hard after we shifted the launch of the Berezovskaya unit three quarters back, i.e., closer to the end of the year. This severely dragged down our revenue and hence earnings and FCF outlook. As far as 2017 is concerned, we are now within the RUB43-45bn EBITDA ballpark guidance that the company provided on the latest conference call, while we cut our capex estimate to RUB13bn to bring it closer to Unipro s guidance. This also had the effect of increasing our post-2017 capex estimates, with 2018 the most affected, chiefly owing to Berezovskaya s recovery.

4 Figure 5: Unipro target price calculation Valuation Summary Current Price (local), RUB 2.32 EV/EBITDA (4.9x), RUB 2.94 Upside (Downside): +26.8% P/E (8.2x), RUB 2.56 Upside (Downside): +10.6% DCF, RUB 3.61 Upside (Downside): +55.7% Blended TP (local), RUB/share 3.18 Upside (Downside): +37.2% Source: Bloomberg, ATON Research Dividend Play Reiterated, Ample Upside Post Berezovskaya Re-Launch Despite a deterioration in our earnings and cash flow projections as discussed in previous section, positively, Unipro s attractive dividend case remains in place. The company reiterated its dividend outlook of a RUB12bn payout in which suggests RUB0.19/share, or a decent 8% yield. Our model confirms that despite a capex-heavy period Unipro will still be capable of paying dividends without needing leverage. We expect a FCF squeeze in 2018 as investments into Berezovskaya s recovery swell, and this explains Unipro s reluctance to increase its dividends in Beyond 2018, however, we expect a far brighter picture with the company increasing dividends above RUB0.20/share in 2019, followed by a jump to over RUB0.30/share. The latter is reflective of the Berezovskaya unit s re-launch, and hence a spike in earnings and FCF. Unipro is debt-free, and aside from the vague prospect of old capacity modernisation, it does not plan to make any further investments into its power generation business in Russia. We therefore continue to believe that Unipro is well-equipped to turn into a very attractive dividend opportunity as of Figure 6: Unipro FCF profile, RUBmn 50,000 EBITDA OCF Capex FCF 40,000 BTPP 800MW unit 30,000 operational for full year in ,000 10, ,000-20,000-30, E 2018E 2019E 2020E CSA contracts expire for all four CCGTs (1,600MW) FCF squeeze in on BTPP unit's recovery 2021E 2022E 2023E 2024E 2025E Figure 7: Unipro dividend history and outlook, RUB/share DPS DPS (incremental) Base case div yield (rhs) Max potential div yield (rhs) % 8% E 2018E 14% % E 21% % E 25% 20% 15% 10% 5% 0% 4 Unipro s current dividend policy is linked to both net income and FCF. We therefore believe it is worth looking at the company s cash flow profile as it reveals the ample potential to further increase dividends on top of our conservative base-case scenario, and assuming no additional capex. The above chart illustrates this. Given that Unipro has zero debt, and consequently no debt repayments, we believe the company is well-placed to pay generous dividends post-2018, and the chart on the next page illustrates this. In fact, Unipro is well equipped to offer more than a 20% dividend yield as of 2020, on our numbers.

5 Figure 8: Unipro has a solid safety margin to boost its dividends after Berezovskaya 800MW unit s relaunch, RUBmn 160, , , ,000 80,000 60,000 OCF , 127,194 Additional dividend upside Dividends , 58,381 40,000 Capex , 20, insurance 56,153 0 proceeds, 20,449 Short-term Sources of investments cash (end- Cash usage Cash and equivalents (end-2016) 2016), $780 Short-term investments (end-2016) 2017 insurance proceeds OCF Capex Dividends Debt repayments Additional dividend upside Figure 9: Unipro DCF sensitivity to BTPP recovery capex (RUB/share) % increase in remaining recovery capex cuts DCF by 2.5% Source: ATON Research Figure 10: Unipro DCF sensitivity to timing of BTPP unit re-launch year delay in BTPP re-launch drags DCF down by 7.5% 35 Oct 2020 Sep 2020 Aug 2020 Jul 2020 Jun 2020 May 2020 Apr 2020 Mar 2020 Feb 2020 Jan 2020 Dec 2019 Nov 2019 Oct 2019 Sensitivity to Capex/Re-Launch Delays The key risk to Unipro s investment case is the potential upward revision of its recovery capex together with possible delays in the re-launch of its 800MW unit. The latter implies further delays in receiving CSA capacity payments that are particularly high in the case of the Berezovskaya coal-fired power unit, given that it operates in the Siberian pricing zone. Our sensitivity analysis shows that the DCF valuation does not suffer much even if the remaining recovery capex increases 25% to RUB35bn from the currently expected RUB28bn our DCF valuation loses only a marginal 2.5%. Such limited sensitivity makes sense given that the recovery capex is only approximately 30% of our expectation of the company s total capex until 2025 (we run our model until that year). Hence, even a 25% jump in recovery capex to RUB35bn would lead to this share increasing to 37% only, and thus would not be as detrimental to Unipro as it might appear. It is worth adding that Unipro s management believes that on top of the current RUB28bn, the maximum additional recovery capex is RUB5bn. Hence our 25% assumption is very unlikely and is purely a hypothetical illustrative case. Unipro s valuation is, however, more sensitive to the timing of the 800MW unit s re-launch. In fact, for every month that the unit s start-up is delayed, the DCF value is reduced by approximately 0.6%. A one-year delay in the 800MW unit s re-launch (end 3Q20 instead of 3Q19) leads to a 7.5% reduction in our DCF valuation, i.e. it is sensitive. This is because the new CSA-paid unit is high-margin (we estimate incremental EBITDA of RUB14-15bn, and confirmed by the company s guidance) and hence markedly affects Unipro earnings starting from Source: ATON Research 5

6 Figure 11: Unipro vs Russian and global power generation peers Company Country Mcap, $mn EV/S EV/EBITDA P/E EV/kW 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E $/kw Russia GenCos RusHydro Russia $5, x 1.0x 0.9x 4.1x 3.7x 3.4x 5.0x 4.7x 4.2x $191 Inter RAO Russia $5, x 0.3x 0.3x 2.9x 2.9x 3.0x 5.8x 5.3x 5.2x $117 Unipro Russia $2, x 1.4x 1.3x 2.7x 4.5x 4.1x 4.7x 9.2x 8.5x $193 Enel Russia Russia $ x 0.8x 0.7x 3.7x 3.5x 3.5x 6.1x 5.7x 4.9x $109 OGK-2 Russia $ x 0.7x 0.7x 3.7x 3.7x 3.4x 4.9x 4.7x 4.5x $100 TGK-1 Russia $ x 0.9x 0.9x 3.3x 3.3x 3.6x 6.3x 5.5x 4.8x $176 Mosenergo Russia $1, x 0.5x 0.6x 2.7x 3.0x 4.5x 6.4x 6.9x 17.8x $147 Russia GenCos mean (wght) 0.8x 0.7x 0.7x 3.3x 3.5x 3.5x 5.5x 5.8x 6.7x $153 Russia GenCos median 0.8x 0.8x 0.7x 3.3x 3.5x 3.5x 5.8x 5.5x 4.9x $147 EM GenCos Huaneng Power International China $13, x 2.0x 2.0x 9.9x 7.6x 7.4x 29.2x 13.7x 12.5x $537 CLP Holdings LTd China $26, x 3.2x 3.2x 11.2x 10.9x 11.7x 16.3x 15.9x 17.6x $1,869 China Resources Power China $9, x 2.4x 2.3x 7.7x 6.6x 6.3x 12.2x 9.2x 8.4x $716 CGN Power Corp China $11, x 4.6x 4.1x 10.0x 8.6x 7.7x 9.6x 8.6x 7.8x $2,268 Huadian Power International China $6, x 2.0x 1.9x 7.8x 6.2x 5.9x 30.2x 12.5x 11.7x $445 Datang International Power Gen Co China $7, x 2.8x 2.6x 8.7x 7.0x 6.8x 22.3x 12.3x 11.6x $628 China Yangtze Power Co China $50, x 8.9x 8.8x 11.0x 11.1x 11.1x 16.7x 17.1x 16.9x $2,528 NTPC India $21, x 2.7x 2.3x 10.9x 9.7x 8.2x 14.5x 12.4x 10.5x $956 KEPCO S. Korea $24, x 1.3x 1.3x 4.8x 4.4x 4.2x 6.8x 5.8x 5.5x $760 Ratchaburi Elec Gen Holding Thailand $2, x 1.9x 1.9x 13.5x 13.1x 13.6x 12.3x 11.7x 11.3x $408 CEMIG Brazil $3, x 1.1x 1.1x 6.6x 5.9x 5.6x 9.0x 6.3x 5.3x $924 Eletrobras Brazil $6, x 1.6x 1.6x 8.0x 5.7x 4.7x 7.4x 4.2x 3.1x $414 PGE Poland $7, x 1.3x 1.3x 4.8x 4.5x 4.3x 9.7x 9.2x 9.0x $706 EDP Portugal $13, x 2.1x 2.2x 8.9x 8.9x 8.6x 12.7x 12.2x 11.5x $1,602 EDP Renovaveis Portugal $7, x 5.5x 5.1x 8.3x 7.9x 7.3x 32.6x 29.5x 24.1x $1,296 CEZ Czech Rep. $10, x 1.7x 1.7x 6.0x 6.1x 6.2x 13.9x 15.6x 18.3x $857 EM GenCos mean (wght) 4.1x 3.9x 3.8x 8.9x 8.3x 8.1x 15.6x 13.1x 12.7x $1,424 EM GenCos median 2.2x 2.1x 2.1x 8.7x 7.6x 7.3x 13.3x 12.3x 11.4x $808 DM GenCos Verbund Austria $7, x 3.3x 3.2x 11.1x 12.3x 11.2x 20.7x 25.3x 20.3x $1,174 EDF France $30, x 0.9x 0.9x 4.3x 4.0x 3.9x 13.1x 11.8x 11.3x $540 E.ON Germany $24, x 0.5x 0.5x 4.0x 4.1x 4.0x 14.9x 14.6x 14.5x $518 RWE Germany $14, x 0.4x 0.4x 3.5x 3.6x 3.6x 9.1x 11.7x 10.8x $483 A2A Italy $5, x 1.5x 1.4x 6.8x 7.0x 6.8x 12.4x 12.5x 12.1x $1,011 Enel Italy $60, x 1.5x 1.5x 7.2x 6.9x 6.7x 14.2x 12.8x 11.8x $1,489 Fortum Finland $15, x 2.8x 2.8x 9.9x 9.8x 9.8x 19.3x 19.1x 18.7x $1,128 Endesa Spain $25, x 1.4x 1.3x 8.0x 7.7x 7.5x 16.2x 15.2x 14.4x $2,014 Iberdrola Spain $51, x 2.2x 2.1x 9.4x 8.6x 8.1x 15.7x 14.7x 13.7x $1,938 Centrica UK $14, x 0.5x 0.5x 6.0x 6.0x 5.9x 12.8x 12.2x 11.7x $3,072 Drax Group UK $1, x 0.4x 0.4x 7.1x 6.2x 5.7x 47.1x 27.4x 18.4x $560 SSE UK $18, x 0.8x 0.8x 9.5x 9.4x 9.1x 11.3x 11.7x 11.2x $2,804 American Electric Power US $35, x 3.6x 3.5x 10.6x 10.0x 9.5x 19.5x 18.4x 17.4x $1,503 Dominion Resources US $50, x 6.3x 6.0x 13.8x 12.3x 11.3x 21.6x 19.1x 18.1x $3,916 DTE Energy Company US $19, x 2.7x 2.7x 11.9x 11.1x 10.1x 20.4x 19.2x 18.0x $2,646 Duke Energy Corp US $60, x 4.5x 4.3x 11.5x 11.0x 10.4x 18.9x 17.9x 16.8x $1,993 Edison International US $26, x 3.2x 3.1x 9.1x 8.6x 8.0x 18.5x 18.4x 16.9x $6,588 PG&E Corp US $35, x 2.9x 2.8x 8.5x 8.0x 7.6x 18.8x 18.0x 17.0x $7,038 Southern Co US $48, x 4.3x 4.1x 11.2x 11.1x 10.2x 16.4x 16.2x 14.9x $2,250 Xcel Energy US $24, x 3.3x 3.1x 10.7x 10.2x 9.6x 21.0x 19.9x 18.7x $547 Tokyo Electric Power Co Japan $6, x 1.3x 1.3x 8.4x 8.7x 8.5x 4.0x 2.6x 3.9x $975 Chubu Electric Power Co Japan $9, x 1.3x 1.3x 8.7x 9.3x 9.0x 9.5x 13.8x 12.6x $966 Kansai Electric Power Co Japan $12, x 1.7x 1.8x 9.3x 8.8x 8.8x 11.5x 9.8x 9.8x $1,264 DM GenCos mean (wght) 2.9x 2.8x 2.7x 9.3x 8.8x 8.4x 16.7x 15.9x 14.9x $2,346 DM GenCos median 1.7x 1.7x 1.8x 9.1x 8.7x 8.5x 16.2x 15.2x 14.5x $1,489 Source: Bloomberg, ATON Research 6

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Investment ratings Investment ratings are a function of ATON LLC expectations of total return on equity (forecast price appreciation and dividend yield within the next 12 months, unless stated otherwise in the research). The investment ratings may be determined by the following standard ranges: Buy (expected total return of 15% or more); Hold (expected total return of 0-15%); Sell (expected negative total return). Standard ranges do not always apply to emerging market securities and ratings may be assigned on the basis of the analyst s knowledge of the securities. Investment ratings are determined at the time of initiation of coverage of a company of equity securities, or a change in target price of any of the company s equity securities. At other times, the expected total returns may fall outside of the range used at the time of setting a rating because of price movement and/or volatility. 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