Research Notes
OGK-2/OGK-6: "entrance ticket" to underpriced generation segment
| 09.03.11 |
In 2011, one of most significant events in the Russian utility universe is the merger of OGK-2 and OGK-6. The generation company that should emerge as a result is to become a true market giant, with nearly 18 GW of total electricity-producing capacity and after RusHydro, is to become the second largest IC among publicly traded Russian electric utilities. In our opinion, minority holders in both companies should benefit from the merger, as the united genco will naturally have an increased market share and higher stock liquidity. We have updated our valuation models for OGK-2 and OGK-6 and consider their equities as an ideal way to enter the share capital of the future consolidated company.
Stock liquidity to improve. The merger of OGK-2 and OGK-6 is to see the emergence of a company with a USD 3.2 bn MCap and doubled free-float in dollar terms. The company could become the leading thermal genco in terms of capitalization and free-float.
Merger to emphasize companies’ advantages and bring in additional value for shareholders. The united company should be able to strengthen its positions on the liberalized energy market, due to the more balanced coverage of the country’s energy zones. In addition, it could reduce administrative expenses and improve operating efficiency by streamlining fuel expenses and equipment purchase expenses. A controlling share in the genco will belong to Gazprom, which could secure the company a more rigid stance in talks with regulatory authorities and stable gas deliveries to power plants.
Market liberalization and proceeds from capacity supply contracts are key upside drivers . Full liberalization of the wholesale electricity market and a steady rise in revenues under capacity supply contracts signed by OGK-2 and OGK-6 should ensure the united company a steady growth in earnings over the coming years.
Buy both gencos’ shares to hedge valuation risks. Our DCF valuation for both gencos is indicative of OGK-2’s larger fundamental undervaluation in comparison with OGK-6. However, an official valuation that is to be made before the merger in order to calculate the swap ratios can substantially differ from ours. To hedge risks related to the possibly unfavorable swap ratios, investors may consider buying shares in both gencos.
Regulation risk to increase. In addition to traditional market and fuel risks, for thermal gencos, regulatory risks can markedly increase in the year before the presidential election, in light of the government’s desire to freeze electricity prices for end-users.
Based on a DCF valuation, both gencos were assigned BUY rating. The respective target year-end 2011 prices are USD 0.086 with a 64% upside for OGK-2, and USD 0.063 with a 38% upside for OGK-6.
* Short overviews of equity research reports and sector reports are posted on the website http://www.finamrus.com with a 1-day delay after their full versions are emailed to the company’s clients. To get overviews on the day of their release, please contact your manager at Finam to sign up for full versions of research reports.
Sectors: Power Utilities, Heat GenerationCompanies: Wholesale Generation Company 2 of the Electricity Market, Wholesale Generation Company 6 of the Electricity Market