29 January 2009
Russian Gencos
Gloomier outlook for 2009
Dmitry Bulgakov
Research Analyst
(7) 495 933 9227
dmitry.bulgakov@db.com
Economic downturn takes its toll on power sector
In 2009, generators will increase their sales in the free market, but the general
economic downturn – with contracted power demand and lower free prices –
does not promise to boost the sector’s profitability. This leads us to lower our
2009 estimates. The companies cannot shield themselves from free market
volatility as they sell nearly all their unregulated volumes on spot. Next year’s
performance depends on whether power demand will start recovering and push
up prices, which we believe will happen.
Deutsche Bank AG/London
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may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
RusHydro (HYDR.RTS),USD0.02 Buy
OGK-2 (OGKB.RTS),USD0.01 Buy
OGK-4 (OGKD.RTS),USD0.01 Buy
Mosenergo (MSNG.RTS),USD0.02 Buy
Companies featured
RusHydro (HYDR.RTS),USD0.02 Buy
2007A 2008E 2009E
DB EPS (USD) – 0.0029 0.0042
P/E (x) – 6.7 4.5
EV/EBITA (x) – 4.9 3.7
OGK-1 (OGKA.RTS),USD0.01 Buy
2007A 2008E 2009E
DB EPS (USD) 0.0120 0.0013 -0.0006
P/E (x) 9.3 6.9 –
EV/EBITA (x) 9.0 3.8 21.6
OGK-2 (OGKB.RTS),USD0.01 Buy
2007A 2008E 2009E
DB EPS (USD) -0.0004 0.0003 -0.0021
P/E (x) – 26.0 –
EV/EBITA (x) 224.6 – 37.0
OGK-3 (OGKC.RTS),USD0.01 Buy
2007A 2008E 2009E
DB EPS (USD) 0.0023 0.0026 0.0004
P/E (x) 67.0 3.1 21.1
EV/EBITA (x) 60.5 -34.2 –
OGK-4 (OGKD.RTS),USD0.01 Buy
2007A 2008E 2009E
DB EPS (USD) 0.0007 0.0015 0.0006
P/E (x) 165.4 6.3 17.0
EV/EBITA (x) 103.1 1.3 37.6
OGK-5 (OGKE.RTS),USD0.02 Buy
2007A 2008E 2009E
DB EPS (USD) 0.0005 0.0010 -0.0024
P/E (x) 306.0 19.4 –
EV/EBITA (x) 157.5 14.9 33.9
OGK-6 (OGKF.RTS),USD0.01 Buy
2007A 2008E 2009E
DB EPS (USD) 0.0023 -0.0000 -0.0018
P/E (x) 62.7 – –
EV/EBITA (x) 29.5 – –
TGK-1 (TGKA.RTS),USD0.00 Buy
2007A 2008E 2009E
DB EPS (USD) -0.0000 0.0000 -0.0000
P/E (x) – 3.3 –
EV/EBITA (x) – 6.7 10.1
Mosenergo (MSNG.RTS),USD0.02 Buy
2007A 2008E 2009E
DB EPS (USD) -0.0015 -0.0003 0.0019
P/E (x) – – 13.2
EV/EBITA (x) – 42.4 8.1
Volzhskaya TGK (TGKG.RTS),USD0.00 Buy
2007A 2008E 2009E
DB EPS (USD) 0.0007 0.0004 -0.0005
P/E (x) 158.0 11.9 –
EV/EBITA (x) 63.2 10.5 18.3
Kuzbassenergo (KZBE.RTS),USD0.00 Hold
2007A 2008E 2009E
DB EPS (USD) -0.0003 0.0003 0.0003
P/E (x) – 8.6 7.3
EV/EBITA (x) – -2.1 5.8
TGK-13 (TGKM.RTS),USD0.00 Buy
2007A 2008E 2009E
DB EPS (USD) -0.0004 -0.0001 -0.0000
P/E (x) – – –
EV/EBITA (x) – – 7.4
Global Markets Research Company
Marking to market the power prices
Since our last sector update in December, Russian power demand further declined
and is now down by 8% YoY. The numbers released by System Operator for
Russian power consumption in December 2008 show contraction of 5% YoY,
while data from January indicate that demand eroded by c. 8% YoY within the
European and Siberian parts of Russia (ex-Far East). Meanwhile, January spot
prices in the European part currently stand at c. USD17-19/MWh. Following the
government’s decision to hike gas tariffs quarterly and taking into account weaker
demand, we lower our free power price estimates for 2009 by 14%. We also
further reduce power production forecasts for this year.
Good 1Q and higher free volumes in 2H09
In 1Q09, we project that the gas-fired gencos will benefit from the difference
between a c. 18% rise in the power tariffs and an only 5% increase in the gas
tariff in 1Q. In 2H09 -- when the free sector should grow to 50% of total output --
the generators would benefit from higher sales on the free market. However
earnings in dollar terms should decrease due to further rouble devaluation and
mounting financing costs (as we assume that generators will borrow to finance
their capex). In this report, we introduce the new DB forecast on the RUR/USD
exchange rate in 2009-10.
Changes in target prices and recommendations (see page 11 for detail)
We update our models and revise our target prices. We reduce our 2009 EBITDA
forecasts by 41-72% for OGKs and by 9-47% for TGKs; we reduce RusHydro’s
EBITDA by 7%. We cut our 12-month TPs for RusHydro, all thermal OGKs, as well
as for Mosenergo, Kuzbassenergo and TGK-13; we increase TPs for the remaining
TGKs. We remain Buyers of all OGKs and several TGKs as we expect a recovery in
power demand and power prices in 2010-11, leading to a powerful increase in
profitability of the generators. Importantly, crucial decisions regarding the power
market liberalisation and gas price deregulation until 2011 are all unchanged.
DCF-based valuations; regulatory risks remain high
We use a DCF-based valuation with WACC rates ranging from 15.9% to 18.1%
and a TGR of 2% (see Figure 11 on p. 12). We believe that in the current
environment the main short-term downside risk is further demand destruction and
subsequently lower free power prices. However, our sensitivity check shows that
we may see substantial improvement in profitability should spot prices recover.
Regulatory risks remain high due to incomplete power and gas market
deregulation.