I purchased Lenenergo Prefs final week at a mean of 168. It is a 3% weight, I’m additionally re-entering EOS Russia – a fund holding Russian grid firms, additionally at a 3% weight.
This got here to me from EOS Russia – a Swedish listed funding in Russian electrical energy distribution grids (kindly advisable by one among my beloved readers). These are principally owned by Rosetti – the Major Russian electrical energy operator however have minority shareholders and (considerably illiquid) listed stakes. They’re very low cost and appear to have turned a nook by way of profitability / dividends. EOS are buying and selling at a c20% low cost to NAV, have fairly low bills and have holding in what look like very undervalued property turning the nook.
EOS put it effectively right here:
If the businesses proceed operationally on the present trajectory and dividend payouts stay at round 40% of IFRS web earnings, the dividends which will fairly be anticipated on 2021 earnings would suggest the next dividend yields at present share costs: MRSK Middle-Volga 13-15%, MRSK Urals 17-22%, MRSK North-West 4-10% and Lenenergo pref 12.8% (this based mostly on Lenenergo’s most popular dividend system). MRSK Volga’s dividends will possible be nonetheless zero or very modest as the corporate reported a loss within the first half, though it nonetheless has a good likelihood to interrupt even for the complete 12 months. MRSK Volga’s outcomes ought to enhance at the least considerably on the again of rising industrial exercise within the area.
(P2 https://www.eos-russia.com/wp-content/uploads/MRSKnewsletter_Aug21.pdf)
I really assume Lenenego pref’s dividends will likely be greater than 12.8%. My finest guess based mostly on the half 12 months might be a desire dividend of 19-25 Rub per share. so a yield of c11-15%. I really assume nearer to fifteen%, however we are going to see. Rosetti prefs commerce at a c3-10% yield (it varies so much) so if this low cost narrows it implies a good rise in value, although RSTI is way bigger, and extra liquid. Russian base charges are at 6.75% (having simply risen). Distribution needs to be a long-term steady enterprise, significantly sooner or later.
Russian desire shares are considerably uncommon they normally provide a share of web revenue – distributed amongst all desire share holders. Rights can solely be altered with the consent of desire holders. Often if the corporate goes to do away with Prefs a proposal is made to purchase them out following an impartial appraisal. Clearly that is Russia, so do you actually belief all the things will likely be executed in an above board approach? Apart from day-to- day inefficiency and corruption I’m not conscious of a lot minority oppression within the electrical energy business. Nearly all Lenenergo is owned by Rosetti or the Saint Petersburg metropolis authorities, the minorities are solely 2.5% of the shares in issue- so (hopefully) barely value stealing from. The prefs are an inexpensive proportion of this (22%), sadly, I don’t have a breakdown of who owns the prefs.
There are many inefficiencies and oddities within the Russian electrical energy market – totally different tariffs to do the identical factor for various firms, decrease prices in numerous areas, a few of that is coverage to help sure causes, some is simply the best way the system developed and doesn’t make a lot sense. They’re cleansing all of it up and transferring (for distribution) to a regulated asset base / charge of return regulation from price plus. This could give Lenenergo and the opposite grids scope to chop prices (which have been based mostly on price+ regulation). I imagine this has been began in Leningrad / St Petersburg already, although laborious data on this has proved inconceivable to search out, one of many downsides in investing abroad.
There may be no need to fret about excessive vitality costs. Russia makes use of decrease inner fuel costs so I’d not anticipate there to be authorities motion associated to this, in contrast to in Europe the place this can be a actual chance.
There may be some dialogue of a Rosseti buyout of Lenergo. I feel the ord’s are the place you need to be if you wish to play this as they are going to have a look at P/B low cost and St Petersburg govt has a far greater price value. I choose the prefs attributable to a pleasant excessive (hopefully extra steady) yield/
Don’t neglect as effectively that the Rouble is undervalued on a PPP stage and phrases of commerce look like enhancing with a better oil/fuel/pure useful resource value.
So that you get a 10-15% yield, scope for share value rises sooner or later and (doubtlessly) appreciation in trade for acceptance of a small stage of corp governance danger / opacity. Relying on H2 outcomes I’d hope for speedy appreciation in Lenenergo over the following 12 months. EOS Russia will take a number of years to play out however has a a number of of the upside.
As ever ideas / feedback appreciated.
