Research Notes
OGK-4: highly efficient genco with strong strategic shareholder
| 05.06.09 |
We are starting our analytical coverage of Fourth Generation Company of the Wholesale Electricity Market (OGK-4), whose core activities are the generation and sale of electricity. The genco should gain a strong competitive advantage during the liberalization of the electricity market thanks to its high-performance generation capacities. The company’s strategic investor, German-based E.ON, can raise productivity at OGK-4 and lobby its interests at a government level.
High capacity load ratio. Among Russian electricity generation companies, OGK-4 has the lowest specific fuel consumption rate per kWh of produced energy. That is why dispatch authorities have opted to load OGK-4’s capacities far more than other gencos’; which means that OGK-4 enjoys a higher capacity load ratio than its rivals.
High-performance generation capacity. As the electricity market is liberalized, OGK-4 could achieve higher margins than its rivals, thanks to its moderate specific fuel consumption and low expenses.
Strong strategic shareholder. OGK-4’s strategic shareholder, German-based E.ON, is one of Europe’s largest energy companies. Additionally, E.ON owns 6% of Gazprom shares and actively cooperates with the gas giant. This gives the German company both lobbyist positions in the Russian power utility sector and administrative authority in respect of OGK-4.
High corporate governance quality. OGK-4 has one of the best corporate governance systems in the wholesale electricity generation segment and is noted for its high information transparency and respect for minority shareholders’ interests.
Efficiently priced investment program. OGK-4’s mid-term investment program has a far lower construction price per 1 MW of generation capacity than the average industry indicator.
The company does not have any significant specific risks. In our opinion, the risks in relation to OGK-4 are characteristic of the whole thermal generation segment: no long-term rules for the capacity market, low stock liquidity, small dividends, and uncertain capacity utilization under mandatory investment programs.
Following our DCF valuation, we assign a BUY rating to OGK-4 with a target price of USD 0.123 per share at the end of 2009.
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Sectors: Power Utilities, Heat GenerationCompany: Wholesale Generation Company 4 of the Electricity Market