I purchased Lenenergo Prefs final week at a mean of 168. This can be a 3% weight, I’m additionally re-entering EOS Russia – a fund holding Russian grid corporations, 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 one in every of my beloved readers). These are largely owned by Rosetti – the Predominant 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 by way of profitability / dividends. EOS are buying and selling at a c20% low cost to NAV, have fairly low bills and have holding in what seem like very undervalued belongings turning the nook.
EOS put it nicely right here:
If the businesses proceed operationally on the present trajectory and dividend payouts stay at round 40% of IFRS web income, the dividends which will fairly be anticipated on 2021 earnings would suggest 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 yr. MRSK Volga’s outcomes ought to enhance no 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 likely be greater than 12.8%. My finest guess primarily based on the half yr might be a desire 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 an honest rise in worth, although RSTI is way bigger, and extra liquid. Russian base charges are at 6.75% (having simply risen). Distribution must be a long-term secure enterprise, notably sooner or later.
Russian desire shares are considerably uncommon they normally 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 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 all the pieces will likely be achieved in an above board approach? 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 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 – completely different tariffs to do the identical factor for various corporations, decrease prices in several areas, a few of that is coverage to assist sure causes, some is simply the best way 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 / fee of return regulation from value plus. This could give Lenenergo and the opposite grids scope to chop prices (which had been primarily based on value+ regulation). I imagine this has been began in Leningrad / St Petersburg already, although exhausting data on this has proved not possible to search out, one of many downsides in investing abroad.
There may be no use to fret about excessive vitality costs. Russia makes use of decrease inner gasoline costs so I might not count on there to be authorities motion associated to this, not like in Europe the place it is 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 are going to take a look at P/B low cost and St Petersburg govt has a far greater value worth. I desire the prefs as a result of a pleasant excessive (hopefully extra secure) yield/
Don’t neglect as nicely that the Rouble is undervalued on a PPP stage and phrases of commerce seem like bettering with the next 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 stage of corp governance danger / opacity. Relying on H2 outcomes I might hope for fast 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.