FOCUS: Russia’s FGC UES to resume dividend payouts in 2014, yield seen low

By Olga Bodrova

MOSCOW, Dec 16 (PRIME) -- Russian power grid firm FGC UES has recently announced plans to post a 3.3 billion ruble net profit for 2014 and pay dividends for the first time since 2010. Analysts welcomed the intention, but said they expected a low dividend yield, which would discourage investors. Moreover, investors are not sure of FGC UES’ sustained profitability and the stability of dividend payments amid the tariff freeze, analysts said.

Major Russian power companies are gradually improving their financial results and resuming dividend payments. Power holding Inter RAO has recently posted solid IFRS financial results for January–September and promised to pay 2014 dividends after a 3-year break if its cash flow is positive.

The Federal Grid Company of Unified Energy Systems (FGC UES), a unit of state-controlled Russian Grids, plans to pay 1.2 billion rubles in dividends for 2014, CEO Andrei Murov said at a recent meeting with investors. The sum will include 436.8 million rubles that the company has already paid in dividends for January–March.

The company plans to pay dividends even though it cut its 2014 net profit forecast under Russian Accounting Standards (RAS) to 3.3 billion rubles from 3.68 billion rubles.

FGC UES’ revenue is projected to rise 4.5% to 162 billion rubles in 2014, while the net debt/EBITDA ratio is expected at 2.7. EBITDA stands for earnings before interest, taxes, depreciation, and amortization.

The last time the company paid dividends on 2010 results, when it earmarked 2.5 billion rubles, or 4.5% of the net profit, for the payout. After that, the company posted net losses for three consecutive years, including a staggering 25.9 billion ruble net loss in 2013.

Until recently, FGC UES had no plans to pay dividends for 2014. In its draft development program for 2015–2019, the company proposed raising the debt/EBITDA threshold to 3.5 from the current 3 and said it could pay dividends if the ratio is below 3, which it expects to happen no earlier than in 2020. The company expected that the ratio to be at 3 in 2015, 3.4 in 2016, 3.5 in 2017, 3.3 in 2018, and 3.2 in 2019.

But the Energy Ministry later cut the company’s investment program to 563 billion rubles from 648 billion rubles.

In 2015, FGC UES plans to keep the trend; it plans to increase the net profit to 7 billion rubles and it will continue paying dividends, Murov said.

Analysts welcomed the company’s decision to pay dividends this year, but said they did not expect high dividend yields and maintained a negative view of the grid segment.

Investors, however, were not encouraged by FGC UES’ dividend intentions and the company’s shares continued falling losing 4.2% on the day of the dividend announcement.

Renaissance Capital analyst Vladimir Sklyar believes that the failure of the dividend news to support the market because the company’s 2.3% dividend yield is too low. For comparison, the yield on metals giant Norilsk Nickel’s dividends is 14% and the yield on dividends of power producer E.ON Russia is 15%, as provided by Sklyar.

Moreover, investors are unsure that FGC UES will continue to bring profit undermining the stability of dividend payments amid the tariff freeze trend, Sklyar said. He also believes that the company would have switched to dividend payments under IFRS (International Financial Reporting Standards) net profit if it wanted to pay dividends to shareholders.

Discounting paper losses, FGC UES will pay 25% of RAS net profit in dividends, exactly the size recommended by the government, the analyst also said.

“We welcome the grid company’s intention to increase the dividend payout, although the still low dividend yield of 2% hardly looks competitive against the backdrop of high rates on the bonds market,” VTB Capital analyst Mikhail Rasstrigin said.

“In general, we reiterate our negative view on the grids segment, which is mostly based on the negative outcome of the reregulation of grids and the doubtful economics of investments.”

Otkritie Financial Corporation senior utilities analyst Sergei Beiden, meanwhile, believes that given that the company has already paid 436.8 million rubles in dividends for the first quarter of 2014, the yield could be less, at just 1.1%. “We do not expect the yield to reach an attractive level in the short-to-medium term, and it is likely to remain below a 3% level,” the analyst said.

This year, the company plans to finish its 115 billion ruble investment program, and its cash flow will be negative, UralSib Capital analyst Dmitry Makarov said.

But thanks to the company’s high profitability, the net debt/EBITDA ratio fell to 2.1 as of late June from 2.4 in December, and the company plans to keep the leverage at the range of 2–3, Makarov said. However, the company said earlier that it did not rule out a growth of its debt/EBITDA ratio to 3.3–3.5 in the short term.

“We believe that the company’s credit risks are minimal and its current schedule of debt repayment is comfortable,” the analyst also said.

Makarov also believes that the second part of the year could be difficult for the company, taking into account tariff freeze from July 1, which will hit its IFRS financial report for the entire of 2014.

(58.3461 rubles – U.S. $1)

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