PJSC Lenenergo (LSNG) is the largest public electric grid company in Russia, which is represented in the transmission and distribution segment of electric power, with annual revenue of 82.4 billion rubles (according to RAS in FY19) and a net profit of 12.7 billion rubles for the same period. Dynamics of financial and operational indicators of the company in 2017-2019 remains positive: revenue growth of 7.7% y / y, operating profit - by 16.0%, net income - by 22.3%. In terms of revenue and operating profit, Lenenergo is comparable only with MOESK (MSRS ticker) and IDGC of TSIP (MRKP ticker) in this segment, other public companies are several times smaller in terms of financial indicators.
The company’s equity capital is divided between ordinary (LSNG ticker) and preferred shares (LSNGp ticker), which are traded on the Moscow Exchange (MOEX). The share capital structure of ordinary shares, like most electric grid public companies in Russia, is simple: 68.22% is under the management of Rosseti, 29.11% belongs to St. Petersburg, 0.95% to IDGC of URAL, 1.72% is in free float. At the same time, the majority of preferred shares (76%) are in free float.
PJSC Lenenergo (LSNG) is one of the most efficient companies in its segment, with EBITDA margin of 44.0% and 15.4% for net profit based on financial statements for 2019. At the same time, the debt burden is only 0.6x Net Debt / EBITDA, which is the lowest level among comparable public companies and allows to effectively repay debt, implements the investment program and pays out the dividends. It is worth noting that the entire debt of the company is in rubles, and the decrease of the key rate of the Central Bank of the Russian Federation from 7.75% to 6.0% in 2019 is a positive factor for reducing the Company’s interest expenses and increasing net profit in 2020-2021. At the same time, the consensus forecast for a reduction in the key rate in 2020 is 5.5%, which serves as an additional upside for stock growth.
Investors are primarily interested in preferred shares (LSNGp), dividends of its is account for 10% of RAS Net Income base. Taking into account net profit for 2019 in the amount of 12.7 billion rubles, dividends are expected to be paid at least 14.0 rubles per 1 preferred share, which is 10.1% of the dividend yield to the closing price on March 2, 2020. This indicator is stable (about 10-13% over the past 3 years) and one of the highest, which allows us to consider the preferred share of Lenenergo PJSC (LSNGp) as one of the best investments in the investor’s dividend portfolio for 2020 and one of the most stable securities in the period of volatility in the financial markets.
In 2019, the preferred share grew by 50.4%, becoming one of the best investments in the market. The current share price (pref) is 150.4 ruble. According to estimates by the DDM method and multiple analysis, the fair price is in range of 180-200 ruble per share that implies the potential upside of 20-33% without dividend history. Stock recommendation - BUY.