Tuesday, December 5, 2023

Lenenergo Prefs – 10-15% yield & EOS Russia – Adventures in Russian Grids – Deep Worth Investments Weblog

I purchased Lenenergo Prefs final week at a mean 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 EOS Russia – a Swedish listed funding in Russian electrical energy distribution grids (kindly really helpful by one in all my beloved readers). These are largely owned by Rosetti – the Principal 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 fairly low bills and have holding in what look like very undervalued belongings 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 internet income, the dividends that will fairly be anticipated on 2021 earnings would indicate the next dividend yields at present share costs: MRSK Heart-Volga 13-15%, MRSK Urals 17-22%, MRSK North-West 4-10% and Lenenergo pref 12.8% (this primarily based on Lenenergo’s most popular dividend method). MRSK Volga’s dividends will doubtless 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 12 months. MRSK Volga’s outcomes ought to enhance not less than considerably on the again of rising industrial exercise within the area.

(P2 https://www.eos-russia.com/wp-content/uploads/MRSKnewsletter_Aug21.pdf)

I truly assume Lenenego pref’s dividends will probably be greater than 12.8%. My greatest guess primarily based on the half 12 months might be a choice dividend of 19-25 Rub per share. so a yield of c11-15%. I truly assume nearer to fifteen%, however we are going to see. Rosetti prefs commerce at a c3-10% yield (it varies lots) so if this low cost narrows it implies a good rise in value, although RSTI is much bigger, and extra liquid. Russian base charges are at 6.75% (having simply risen). Distribution needs to be a long-term steady enterprise, notably sooner or later.

Russian choice shares are considerably uncommon they often provide a proportion of internet revenue – distributed amongst all choice share holders. Rights can solely be altered with the consent of choice holders. Often if the corporate goes to do away with Prefs a suggestion is made to purchase them out following an impartial appraisal. Clearly that is Russia, so do you actually belief every thing will probably be achieved in an above board method? Aside from day-to- day inefficiency and corruption I’m not conscious of a lot minority oppression within the electrical energy trade. 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 price stealing from. The prefs are an inexpensive 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 – totally different tariffs to do the identical factor for various firms, decrease prices in numerous areas, a few of that is coverage to help sure causes, some is simply the way in which the system advanced 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 price plus. This could give Lenenergo and the opposite grids scope to chop prices (which have been primarily based on price+ regulation). I imagine this has been began in Leningrad / St Petersburg already, although exhausting data on this has proved unimaginable to seek out, one of many downsides in investing abroad.

There may be no need to fret about excessive vitality costs. Russia makes use of decrease inside gasoline costs so I’d not count on there to be authorities motion associated to this, in contrast to in Europe the place this can be a actual risk.

There may be some dialogue of a Rosseti buyout of Lenergo. I believe the ord’s are the place you wish to be if you wish to play this as they may take a look at P/B low cost and St Petersburg govt has a far greater price value. I desire the prefs attributable to 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 look like enhancing with a better oil/gasoline/pure useful resource value.


So that you get a 10-15% yield, scope for share value rises sooner or later and (probably) appreciation in trade for acceptance of a small degree of corp governance danger / opacity. Relying on H2 outcomes I’d hope for fast appreciation in Lenenergo over the following 12 months. 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.

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