I purchased Lenenergo Prefs final week at a median 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 taking a look at EOS Russia – a Swedish listed funding in Russian electrical energy distribution grids (kindly advisable by certainly one of my beloved readers). These are principally owned by Rosetti – the Important 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 when it comes to profitability / dividends. EOS are buying and selling at a c20% low cost to NAV, have moderately low bills and have holding in what seem like very undervalued property turning the nook.
EOS put it properly 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 moderately be anticipated on 2021 earnings would indicate 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 well-liked dividend method). 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 probability to interrupt even for the total yr. MRSK Volga’s outcomes ought to enhance at the least considerably on the again of rising industrial exercise within the area.
I really suppose Lenenego pref’s dividends will likely be greater than 12.8%. My greatest guess based mostly on the half yr might be a desire dividend of 19-25 Rub per share. so a yield of c11-15%. I really suppose nearer to fifteen%, however we’ll see. Rosetti prefs commerce at a c3-10% yield (it varies quite a bit) so if this low cost narrows it implies a good rise in worth, although RSTI is much bigger, and extra liquid. Russian base charges are at 6.75% (having simply risen). Distribution must be a long-term steady enterprise, significantly sooner or later.
Russian desire shares are considerably uncommon they often 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 eliminate Prefs a suggestion is made to purchase them out following an impartial appraisal. Clearly that is Russia, so do you actually belief every part will likely be finished in an above board method? 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 affordable 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 – completely different tariffs to do the identical factor for various firms, decrease prices in numerous areas, a few of that is coverage to assist sure causes, some is simply the way in which 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 value plus. This could give Lenenergo and the opposite grids scope to chop prices (which have been based mostly on value+ regulation). I imagine this has been began in Leningrad / St Petersburg already, although laborious info on this has proved not possible to search out, one of many downsides in investing abroad.
There’s no use to fret about excessive power costs. Russia makes use of decrease inner gasoline costs so I’d not count on there to be authorities motion associated to this, not like in Europe the place this can be a actual chance.
There’s some dialogue of a Rosseti buyout of Lenergo. I feel the ord’s are the place you wish to be if you wish to play this as they may have a look at P/B low cost and St Petersburg govt has a far greater value worth. I choose the prefs because of a pleasant excessive (hopefully extra steady) yield/
Don’t overlook as properly that the Rouble is undervalued on a PPP degree and phrases of commerce seem like bettering with a better oil/gasoline/pure useful resource worth.
So that you get a 10-15% yield, scope for share worth rises sooner or later and (doubtlessly) appreciation in change for acceptance of a small degree of corp governance threat / opacity. Relying on H2 outcomes I’d hope for speedy appreciation in Lenenergo over the subsequent yr. 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.