Research Notes
TGK-7: a strategic investor is expected
| 24.06.09 |
We begin coverage of Territorial Generating Company No.7 (TGK-7). Uncertainty over a strategic investor for the genco has capped growth in its stock valuations and fundamental factors are not fully apparent in quotes for the genco’s shares. However, as soon as things are clarified, fundamental factors should come to the fore in the eyes of investors.
- Heating capacity creates stability: TGK-7 is Russia’s second largest territorial generation company by installed heat capacity. During an economic downturn, demand for heat is more stable than for electricity. This makes TGK-7 financial results more predictable.
- Stable financial position: At the end of 1Q 2009, the genco had a D/E ratio of 0.1. Such low leverage is evidence of the stable financial position of the company, which, if necessary, may easily increase the level of its debt.
- Uncertainty over strategic investor should diminish: Rumor that a TGK-7 strategic investor is unable to pay on time for an earlier acquired state package in TGK-7 has capped growth in share quotations due to uncertainty over its development strategy. Once there is more clarity about the issue, the company’s market capitalization should benefit.
- Investments downsized prior to project review: According to management, TGK-7 has suspended some investment projects in order to concentrate on high priority projects on which agreements for capacity provision have been reached. This seems like an adequate reaction to the ongoing changes in the economy and should prompt the government to review the financial viability of some projects.
- Lack of fuel diversification: Gas makes up almost 100% of the company’s fuel balance and this lack of a fuel diversification prevents the company from hedging risks involved in the fluctuation of gas prices. A large surplus of gas in the company’s fuel balance and its reliance on independent gas suppliers could push up costs.
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Sectors: Power Utilities, Heat GenerationCompany: TGC -7