Wood and co Research on Fondul Proprietatea

Fondul Proprietatea (Buy, RON 1.05 PT, 31% upside)

 

NAV at the end of November stands at RON 1.1074, the discount to NAV is at 27.2%.

 

What are the catalysts for the discount to NAV to narrow? More disposals of assets followed by cash distributions.

Asset disposals:

  • Potential sale of stakes held in Electrica subsidiaries to the mother company to be decided by 31 March. The stakes are priced in the NAV at RON 841m (7.2% of the NAV).
  • The listing of Hidroelectrica, the Bucharest Airport, the Constanta port or Salrom could move another 22% of the NAV from the unlisted part to the listed part, adding confidence in the NAV.
  • Disposals from the unlisted part of the portfolio are also possible (e.g., the minority stakes in Enel, E.ON GDF) but more difficult to realize as the fund is captive minority shareholder. The fact that the state is also a minority shareholder could help.

Cash distributions:

  • RON 548m to be paid via a par value decrease to be approved on the AGM on 27 January (6% yield) to be paid on 27 June 2016.
  • Seventh buy-back is approved by the GSM in 29 October 2015 and 742m shares still left to be bought (7% of shares). An accelerated buy-back is possible.
  • RON 1bn can be drawn from Citibank (nothing drawn as of the end of the year after repayment of the previous loan in October when the Romgaz placement took place) and about RON 300m is available in cash.
  • Can still cash in at least RON 400-500m from the companies in the portfolio, even with the lower dividends paid by Petrom.

 

What are the catalysts for changes in the NAV?

  • Current oil prices still indicate downside for Petrom, according to our model (if the oil price does not rebound). For Romgaz, even the lower gas prices still provide an upside according to our estimates (and a high dividend yield in the range of 10%). A favorable decision regarding the oil and gas royalties’ regime in Romania could help the valuation of both companies. Gas prices liberalization and further announcements related to Petrom’s Black Sea gas discovery also should help the valuation of the two largest holdings which account for 38% of the NAV.
  • An increase in Hidroelectrica’s profit, which is reporting above RON 1.1bn pre-tax profit in 2015 even if the meteorological conditions have been poor last year, with volumes down 13.5%  yoy at 15.9 TWh. Hidroelectrica represents 18.5% of Fondul’s NAV.

 

Why should there be a discount to NAV:

  • The level of taxes paid by the Fund is almost zero due to the high accounting costs of the holdings and the holding periods of over two years. We do not see the taxes as generating any discount.
  •  The time value of money generates a discount, but this is not material either. At the NAV value, the largest 20 holdings (94% of the NAV) generate a weighted average yearly earnings yield of 8.5% (for 2014) and the dividends cashed in by the Fund represent a 6% yield on the NAV value. Our implied cost of equity in Romania is 9%.
  • The discount offered when selling larger stakes could be a reason for a discount. This has been the case for the transactions executed so far below 5% of the previous 30 days’ average price.
  • Uncertainty regarding the unlisted portfolio: out of the 48.9% unlisted part of the NAV, a plan exists for 28% for the next 12 months related to disposals (Electrica) or listings (Hidroelectrica, Bucharest Airport, Constanta Port, etc.).

Adding all of this together, we see the current discount to NAV as too high.

 

 

Lucian Albulescu, CFA

Equity Research

WOOD & Company Financial Services, a.s. Palladium, Námìstí Republiky 1079/1a 110 00 Prague 1 Czech Republic

Direct: +420 222 096 273

CZ Mobile: +420 603 500 310

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