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Utilities Watch: February 2012


The Electric Utilities Index rose 8.5% in February, almost the same as the RTS Index (+8.3%). Electricity grids were the best performers, adding 10.8%, while the Power Generation Index saw a more modest gain of 6.7%.

Among the most liquid names, the best performers were MRSK Holding (+10.7%) and FSK (+12.4%). After the average 37% rally YTD in the names, we could see some consolidation in anticipation of the tariff decisions. Inter RAO gained 12% in February, catching up with the market after its weak dynamics in January. RusHydro added 6.9%. Among second tier names, the leaders were OGK 3 (+18.9%), TGK 1 (19.4%) and VRAO (+20.8%).

Electricity demand in February (adjusted for the extra day) printed quite impressive 3.6% YoY growth as the weather was 1.2C colder YoY. After adjusting for the seasonal component, electricity consumption grew 2.5% YoY, while for the first two months it added 1.7% YoY, which is slightly above our annual forecast of 1.4% YoY.

Free electricity prices in February added 13.2% YoY in Siberia but dropped 17.9% YoY in Europe still remaining near the absolute levels seen in December 2011. We expect the dynamic to normalise in the coming months.

Russia remains one of the growth stories. Last Thursday, Italian Enel held a meeting to discuss its FY11 IFRS results and strategic plans. Overall, Enel faces a significant decrease in margins at its European-based generating assets and Russia remains one of the few growth stories in the group as a whole. Enel provided quite conservative financial and capex guidance for OGK 5 in 2012-16, which effectively translates into negative FCF in 2012 and a low chance of there being dividends. However, even under the downgraded financial outlook, we foresee EBITDA increasing at a decent CAGR of 17% in 2012-14, while OGK 5 still looks attractive, trading at 2012F EV/EBITDA of 6.8x, which implies 20-30% discounts to DM and EM peers. 

Mikhail Rasstrigin, Alexander Seleznev
VTB Capital analyst

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