Research Notes
Mosenergo: on way to cost-effectiveness enhancement
| 24.06.10 |
At a presentation on June 15, Mosenergo management unveiled its targets and expectations, which we have incorporated into our valuation model for the company. In particular, the upward revision of the target price for Mosenergo shares is linked to management’s plans to raise cost-effectiveness and capex. At the same time, our model was adversely affected by the potentially unfavorable price parameters of the capacity market.
Stake on efficiency growth . Mostenergo is rated among Russia’s most efficient gencos. However, on a number of indicators, the genco markedly lags behind its foreign peers. In 2009, the genco started a series of cost-cutting programs. Consequently, the company has trimmed its workforce, stepped up repair work without increasing expenses and reduced its specific fuel consumption. Subsequently, the company is set to actively expand these programs with the realization that highly-efficient gencos are bound to become the prime beneficiaries of electricity market deregulation
Investment program targets clarified . At the meeting, the Mosenergo management for the first time announced targets for capex. At the current stage, the genco is considering commissioning three 420MW generating units before 2014. In our view, the genco has a workable investment program, given its plans to install adequate capacity for the Moscow region at an acceptable price .
Weak 1Q2010 financial results . We regard the 1Q2010 IFRS financials reported as fairly weak, which are mainly attributed to factors beyond management’s control. The financial statement should not be a reason for disappointment, and we have revised down our outlook for company financials in 2010.
Startup of capacity market may impair Mosenergo financials . Under the Russian government resolution that sets price parameters for the capacity market, the market may begin with price caps, should the Anti-Monopoly Service (FAS) spot a lack of competition in the free power interchange zone. For the first price zone, where Mosenergo operates, the price ceiling on capacity is set at 13%, or below the genco’s current tariff. In our view, the likelihood that the above-indicated price caps will be applied to Mosenergo capacity is high. The company itself has also admitted this possibility. We have used this precondition in our model, which has led us to revise down our target for revenue.
Based on our DCF-based valuation of Mosenergo shares, we reiterate our BUY rating for the shares, while lowering our target price for the shares to USD 0.17 per share as of year-end 2010.
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Sectors: Power Utilities, Heat GenerationCompany: Mosenergo