Sunday, March 26, 2023

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

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 one in all my beloved readers). These are principally owned by Rosetti – the Fundamental 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 seem like very undervalued property turning the nook.

EOS put it properly here:

If the businesses proceed operationally on the present trajectory and dividend payouts stay at round 40% of IFRS web income, the dividends that will fairly 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 popular dividend components). MRSK Volga’s dividends will seemingly 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 at the very least considerably on the again of rising industrial exercise within the area.


I truly assume Lenenego pref’s dividends can be larger than 12.8%. My finest guess based mostly 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 rather a lot) so if this low cost narrows it implies a good rise in value, although RSTI is way 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 choice shares are considerably uncommon they often provide a proportion of web revenue – distributed amongst all choice share holders. Rights can solely be altered with the consent of choice holders. Normally if the corporate goes to eliminate Prefs a proposal is made to purchase them out following an unbiased appraisal. Clearly that is Russia, so do you actually belief every part can be finished in an above board manner? Aside 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 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 several areas, a few of that is coverage to assist 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 shifting (for distribution) to a regulated asset base / fee of return regulation from price plus. This could give Lenenergo and the opposite grids scope to chop prices (which have been based mostly on price+ regulation). I imagine this has been began in Leningrad / St Petersburg already, although arduous data on this has proved unimaginable to search out, one of many downsides in investing abroad.

There may be no need to fret about excessive power costs. Russia makes use of decrease inner fuel costs so I might not anticipate there to be authorities motion associated to this, in contrast to 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 need to be if you wish to play this as they are going to have a look at P/B low cost and St Petersburg govt has a far larger price value. I choose the prefs as a consequence of a pleasant excessive (hopefully extra steady) yield/

Don’t overlook as properly that the Rouble is undervalued on a PPP stage and phrases of commerce seem like enhancing with a better oil/fuel/pure useful resource value.

So that you get a 10-15% yield, scope for share value rises sooner or later and (probably) appreciation in alternate for acceptance of a small stage of corp governance threat / opacity. Relying on H2 outcomes I might hope for speedy 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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