Research Notes
FGC takes up RAB
| 02.02.10 |
Approved RAB-transition parameters have displeased investors. In late December 2009, the Federal Tariff Service (FTS) disclosed RAB-transition parameters for the Federal Grid Company of the Unified Energy System (FGC). These parameters fell markedly short of both management projections and market expectations, which resulted in a sharp drop in FGC stock prices. The most disappointing factors, in our view, were the 27.6% downturn in the initial regulatory asset base (iRAB) and the adoption of slower tariff growth dynamics.
Management estimates. FGC management has altered its financial projections in view of the approved transition parameters. Although management has somewhat downgraded its forecasts in general, it is still set to maintain the company’s margins at a fairly robust level. For example, the net income margin in 2011 is predicted at around 26%.
No reason for pessimism. Although the RAB-transition parameters authorized by the FTS have fallen short of our expectations, we still believe that the Federal Grid Company should be able to generate a sizeable cash flow under the approved regulatory parameters. The transition of the FGC to an innovative long-term tariff regulation system should encourage management to improve the company’s business efficiency. The RAB-based tariff regime should provide an appealing environment for new investments, while long-term tariff-setting principles should help minimize the FGC’s investment risks.
New target price. The key factors that led us to lower the FGC’s fair price were the reappraisal of the company’s initial regulatory asset base, the revision of rates of return on its equity capital, and updated macroeconomic forecasts.
Following a DCF-based valuation of the FGC, we reiterate our BUY rating for the security, but lower its end-of-year 2010 target price to USD 0.0135 per share.
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Sectors: Power Utilities, Distribution GridsCompany: Federal Grid Company of Unified Energy System JSC