Reforms in Russia’s Utility Sector to Bring Growth in 2020: Report

Share prices in Russia’s utilities sector have surged by 16% last year, with the power sector currently being the only sector performing well in the stock market and is expected to lead it for the rest of the year, bne Intellinews writes.

“The world is slowly but persistently moving toward electricity as the main source of final energy. We estimate that the share of electricity has more than doubled over the last 30 years to 19%. Russia has not ignored this process,” Vladimir Sklyar, an equity analyst with VTB Capital (VTBC), said in a note.

The emerging middle class has been a big source of new demand for electricity. In the Soviet era televisions famously either didn’t work or they blew up when you turned them on. But modern Russia has embraced gizmos as its badge of membership of capitalist society.

At the same time the sheer size of the country means railways and telecom networks, their reform and development, are also driving up demand rapidly. The growing share of service industries (which are more dependent on electricity supply than other energy sources) in GDP have all led to an increase in electricity’s share of the fuel mix in Russia, the report says. Next up will be the advent of electric vehicles, the first of which are starting to make their appearance on Russian roads.

“At the start of this new year, we try to answer a simple question: are Russian utilities a Buy in 2020? A helicopter view on the metrics and sentiment gives a simple answer: yes. Russian utilities are profitable, growing, underleveraged, free cash flow-rich, cheap and generous names in the Russian equity universe with management teams that are already, or are soon to be, motivated by clear and transparent market mechanisms,” Sklyar said.

Russian utilities shares valuations are currently about 50% cheaper than the rest of the Russian market compared on both an EV/Ebitda and p/e basis. That means despite the rally of the last six months there is still more room for growth.

Finally, leading utilities operating in Russia have begun the process of shuffling their generation profile to reflect the rapidly growing concern with the climate crisis and reducing emissions. In one of the most notable deals of 2019 the Russian subsidiary of the Italian power generation company Enel sold off one of its largest power stations as it is coal fired, but has been investing heavily in renewable energy sources to replace the missing capacity, bne Intellinews writes.

With earnings per share (EPS) in the utility sector expected to grow at a double digit rate over the course of this year compared with no growth at all for the benchmark MSCI Russia index, then utilities have already become the default choice for exposure to the Russian stock market, says VTBC. The firms Enel Russia, RusHydro, InterRAO, Unipro and OGK2 are all “pockets of growth” in a sector that is likely to put steady corporate profit growth.

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