PJSC Rosseti (ticker RSTI / RSTIp) is the largest publicly state-owned electric grid company in Russia, whose main business is represented in the transmission and distribution segment of electric power and technological connection with an annual revenue of 1,029.7 billion rubles (according to IFRS for 2019 ) and a net profit of 105.3 billion rubles for the same period. Financial and operational indicators of the company in 2017-2019 are stable but have multidirectional dynamics: revenue growth of 0.8% y / y, adj EBITDA – increase by 3.1% with a decrease in net profit by 15.5% for the same period. This company is the holding company, but not an operating one, which determines the specifics of its activities. PJSC Rosseti is a single operator of energy networks, substations and transformers, which manages the assets of 15 interregional distribution grid companies of Russia (IDGCs) with equity share of more than 50% in its. The volume of electricity transmitted in 2019 is 763 billion kWh (+ 0.25% y / y), the length of power lines is 2.37 million km (+ 0.9% y / y), the number of substations is 517 thousand units. PJSC Rosseti has no analogues both in the distribution energy sector and in the whole in the electric power sector of Russia and CIS. In terms of financial performance, the company is comparable to PJSC Inter RAO (revenue - 1,032.1 billion rubles, net profit 81.9 billion rubles) and PJSC RusHydro (revenue - 366.6 billion rubles, net profit - 643 million rubles).
The share capital of PJSC Rosseti is divided between ordinary and preferred shares, which are traded only on the Moscow Exchange (MOEX). The total amount of share capital is 200 903 014 525 rubles. The share capital structure of ordinary shares, like most electric grid public companies in Russia, is simple: 88.04% under the management of Rosseti PJSC, 9.38% belong to legal entities and the depository, and 2.58% to individuals. At the same time, the majority of preferred shares (56%) are in free float and only 11% of ordinary shares are free floats as of 03/27/2020. Free-float is a key indicator for investors, since, on the one hand, this ratio reflects the liquidity of shares and the spread between buy / sell transactions and, on the other hand, it allows one to understand how open and transparent the company is to minority investors, is ready for dialogue with them and implements an independent management policy.
PJSC Rosseti is the leader in its segment - with EBITDA margin of 30.7-31.4% and 10-12% - in net profit margin based on consolidated financial statements for 2018-2019. At the same time, the debt burden is only 1.3x Net Debt / EBITDA, which is the lowest level among comparable public companies and allows Rosseti to effectively pay off debt, implement the investment program and pay dividends. It is worth noting that the entire debt of the company is in rubles, and a decrease in 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. At the same time, the consensus forecast for a reduction in the key rate in 2020 is 5.5%, which serves as an additional potential for stock growth. Most of the borrowed capital is represented by bonds, the coupon of which has a slight spread to the key rate (less than 1%). Significant risks to the company’s debt for 2020-2021 excluded because PJSC ROSSETI has long bond positions and is hedged by fixed coupon rates.
In the long term (LT) period, investors are interested in both ordinary and preferred shares of a company for several reasons:
• The company approved the long-term development strategy until 2030, according to which the target capitalization of the company by 2024 is 500 billion rubles (+ 117% of the current capitalization of 230 billion rubles); by 2030 - 1,000 billion rubles (+ 234%). Thus, the average annual growth of the company will be about 20%, which is 4-5 times higher than inflation and 2-3 times higher than reliable bonds (including OFZ).
• The company has developed and approved the Concept of Digital Transformation 2020-2030, according to which it is planned to transform the current business structure into a digital direction - making decisions based on automation and predictive analytics.
• According to the top management of PJSC ROSSETI, in the 1st half of 2020 it is planned to approve the Long-Term Management Motivation Program and the Dividend Policy Regulation (50%/75% of Net Income in RAS).
• The sector in which the company and its subsidiaries operate is stable, less risky and more protected from crisis. With the market falling and the financial crisis, the company’s operating and financial performance remains stable.
• During the spread of the coronovirus in March 2020, shares fell 33% to 1.15 rubles per common share. The current growth potential to the maximum of February is 46%.
• Significant underestimation compared to the analogues for the P / E (2.7) and EV / EBITDA (3.7) multiples based on the IFRS financial statements for 2019.
We recommend buying shares of PJSC ROSSETI - ordinary and preferred for investors for a long-term period (1-3 years), which can be an excellent substitute for bonds - high dividend yield when adopting an updated dividend policy and ensure an increase in the value of shares due to fundamental underestimation and current discount for holding at 35%.